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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-23741
INNOTRAC CORPORATION
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1592285
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(State or other jurisdiction of incorporation (I.R.S.Employer
incorporation or organization) Identification No.)
6655 Sugarloaf Parkway, Duluth, Georgia 30097
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
Securities registered pursuant to Section 12(b) of the Act: None.
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Name of each exchange on which registered: The Nasdaq National Market.
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
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Value $.10 Per Share.
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10K. [ ]
The aggregate market value of the voting stock held by nonaffiliates
(which for purposes hereof are all holders other than executive officers and
directors) of the Registrant as of March 18, 1999 was $26,825,569, based on the
closing sale price of the Common Stock as reported by the Nasdaq National Market
on such date. See Item 12.
At March 22, 1999, there were 8,999,995 shares of Common Stock, par
value $0.10 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1998 Annual Report to Shareholders, filed
as an exhibit hereto, are incorporated by reference into Part II of this Annual
Report on Form 10-K for the year ended December 31, 1998 (the "Report").
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
(the "Commission" or the "SEC"), are incorporated by reference into Part III of
this Report.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
PART I
ITEM 1.
BUSINESS................................................................ 1
ITEM 2.
PROPERTIES............................................................... 18
ITEM 3.
LEGAL PROCEEDINGS........................................................ 18
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................... 18
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.............................................. 19
ITEM 6.
SELECTED FINANCIAL DATA.................................................. 19
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 19
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 19
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................. 20
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 20
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................... 20
ITEM 11.
EXECUTIVE COMPENSATION................................................... 20
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................................... 20
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 20
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K............................................................ 21
FINANCIAL STATEMENT SCHEDULES............................................. S-1
SIGNATURES................................................................ II-1
PART I
ITEM 1. BUSINESS
GENERAL
Innotrac Corporation ("Innotrac" or the "Company") is a full-service
provider of customized, technology-based marketing support services to
enterprises, primarily telecommunications companies. The Company's marketing
support services provide its clients with an efficient means of delivering
products or information to their customers, and include product and literature
distribution, computerized inventory and database management and customer-
initiated ("inbound") teleservices. Innotrac works with its clients on a
consultative basis to create customized turnkey solutions to meet client needs,
which range from small, specialty projects to larger integrated fulfillment,
teleservicing and database tracking programs. The majority of Innotrac's growth
over the past five years has come from telecommunications companies and,
specifically, from services related to Caller ID equipment. Although 97% of its
1998 revenues came from BellSouth Telecommunications, Inc. ("BellSouth"),
Pacific Bell ("Pacific Bell"), Southwestern Bell Telephone Co. ("Southwestern
Bell") and US West Communications Services, Inc. ("US West"), the Company has a
broad range of clients, including Home Depot U.S.A., Inc. ("Home Depot"),
National Automotive Parts Association ("NAPA") and Siemens Energy & Automation
Inc. ("Siemens E&A").
Since its formation in 1984, the Company has expanded its capabilities in
response to the needs of clients in a variety of industries and to capitalize on
market opportunities. In 1987, the Company began providing marketing support
services to BellSouth. In 1991, these services were expanded to include
fulfillment services related to Caller ID telecommunications equipment. Under
this program Innotrac (i) sells or rents to BellSouth customers Caller ID
hardware, phone sets and other equipment (branded with BellSouth's logo), (ii)
ships ("fulfill") customers' orders, (iii) tracks inventory levels and sales and
marketing data regarding such items and (iv) maintains teleservicing operations
to handle customer service and technical support for Caller ID units and other
products. The fulfillment services for BellSouth have been the primary force
behind the Company's rapid sales growth. Innotrac has continued to capitalize on
its fulfillment expertise in the telecommunications sector, as evidenced by its
additional arrangements with Pacific Bell, Southwestern Bell and US West.
Recently, Innotrac began providing limited fulfillment services to Ameritech
Corp., Cincinnati Bell Inc. and Bell Atlantic Corporation.
The Company has positioned itself to capitalize on the trend towards
outsourcing of marketing support services by investing in the technology and
infrastructure necessary to offer additional and more advanced services to its
clients. The Company believes that large corporations are increasingly focusing
on their primary businesses and turning to outside service companies to perform
marketing support functions. By outsourcing these functions, companies seek to
(i) replace fixed warehouse, information technology and labor costs with
variable costs, (ii) improve their reaction to business cycles, (iii) improve
customer service and technical support, (iv) manage capacity to meet
fluctuations in demand for products and customer service, (v) create economies
of scale by sharing the costs of advanced telecommunications and fulfillment
systems, and (vi) reduce working capital needs. As the trend toward outsourcing
continues, the Company believes that businesses will increasingly seek to reduce
the number of vendors they utilize and may prefer single-source providers of
integrated, customized marketing support services. The Company believes that
its "one-stop" approach, combined with its use of advanced technology, provides
a competitive advantage in attracting and retaining clients on a long-term
basis.
The flexibility of its services allows the Company to attract clients in a
broad range of industries. Innotrac targets companies that have developed a
large customer base, numerous and/or geographically
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diverse subsidiary or affiliate operations, extensive marketing needs, or
complex point-of-distribution requirements. Companies with these characteristics
tend to need customer support, product or literature distribution, inventory
warehousing and management, or tracking and reporting capabilities. Although a
company may elect to perform these functions in-house, it will require the
development of expensive, labor intensive infrastructures, which may divert a
company's focus from its core competencies. Outsourcing these functions to a
company such as Innotrac may result in a lower cost and higher quality level
than such companies can achieve on an in-house basis.
BUSINESS STRATEGY
The Company's strategy is to take advantage of market trends towards
outsourcing by leveraging its core expertise, reputation for quality and timely
service and strong client relationships. The following are the key elements of
this strategy:
MAXIMIZE CALLER ID BUSINESS. The Company currently distributes Caller ID
units for four of the regional bell operating companies ("RBOCs"): BellSouth,
Pacific Bell, Southwestern Bell and US West. Recently, Innotrac began providing
limited fulfillment services to Ameritech Corp., Cincinnati Bell Inc. and Bell
Atlantic Corporation. Management believes that significant growth opportunities
exist with these clients as the market penetration of Caller ID services
increases and as consumer demand for additional and/or more advanced Caller ID
units grows. Additionally, the Company believes it is well positioned to obtain
similar contracts with other RBOCs and independent local exchange carriers.
LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to
expand its customer base in the telecommunications industry by leveraging the
expertise it has developed and the results it has achieved through long-standing
relationships with several clients in the industry. The Company is also seeking
to expand the level of marketing support services provided to existing
telecommunications clients by cross-selling its other services to such clients.
DEVELOP E-COMMERCE SERVICES. The Company intends on pursuing the sale of
product distribution and related services in the electronic commerce ("e-
commerce") industry by (i) becoming a one-stop source for e-commerce and (ii)
functioning as an e-commerce distributor for manufacturers and large market
driven corporations. The Company believes that it can leverage its current core
competencies into the growing e-commerce industry. Innotrac will offer a
turnkey solution to product distribution via the Internet which will encompass
web design, web hosting, product ownership, product distribution, returns
processing and complete backend customer service.
EXPAND OUTSIDE OF TELECOMMUNICATIONS. Innotrac's full service capabilities
provide it with the flexibility to manage small specialty projects or large
integrated projects whereby the Company becomes a new and distinct channel of
distribution for clients. The Company believes that its infrastructure will
allow it to develop clients in a variety of industries that have numerous and/or
geographically diverse subsidiary or affiliate operations, extensive marketing
needs or complex point-of-distribution requirements. Management believes that
these capabilities will make its services attractive to companies in the
manufacturing and retailing industries, in which it currently has clients, as
well as companies engaged in e-commerce.
CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained
a commitment to the use of advanced technology and intends to continue to
upgrade and enhance its computer hardware and software applications to enable it
to continue to provide flexible and powerful services to its clients. The
Company believes that the use of advanced technology provides a competitive
advantage and results in greater capacity and reduced labor costs. The Company
also believes that continued technological
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advances, particularly those utilizing the Internet, will provide new
opportunities for the Company to tailor its services to meet each client's
needs.
EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to develop value-
added solutions that achieve each client's intended marketing results. The
Company devotes considerable resources to assessing and understanding a client's
industry, products, services, processes and culture, then works with the client
to design programs to reduce the costs and investment required to deliver the
client's marketing support programs. The Company believes that this
consultative partnership approach encourages long-term client relationships.
For example, the Company has provided services to NAPA since 1994, Home Depot
since 1993 and Siemens E&A since 1987. Innotrac has serviced its largest
client, BellSouth, since 1991. The Company believes that this approach also
creates substantial opportunities to expand relationships with existing clients
by cross-selling the full range of its services.
SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take
advantage of the fragmented nature of the marketing support services industry by
selectively acquiring complementary companies that extend its presence into new
geographic markets or industries, expand its client base, add new products,
technologies or services or provide substantial operating synergies. While the
Company has made no acquisitions to date, management believes that there are a
variety of such potential acquisition opportunities.
CALLER ID FULFILLMENT SERVICES
The Company has experienced significant growth in revenue in recent years
primarily due to the growth in its Caller ID fulfillment services. The
Company's Caller ID services began in 1991 with BellSouth, when the Company
initiated a fulfillment program to sell or rent to BellSouth customers Caller ID
hardware, phone sets and other equipment. In 1993, Innotrac began billing the
charges on customers' telephone bills. The Company now provides such services to
US West, Pacific Bell, Southwestern Bell and Nevada Bell. Recently, Innotrac
began providing limited fulfillment services to Ameritech Corp., Cincinnati Bell
Inc. and Bell Atlantic Corporation.
A transaction generally begins when a customer calls one of the Company's
RBOC clients and speaks with a service representative to obtain Caller ID
service. The representative may offer to sell or rent to the customer one of
several models of Caller ID and telephone products that can be paid for through
the customer's phone bill, on an interest free installment basis. If the
representative makes the sale, the order is sent via electronic data interchange
("EDI") to Innotrac. Occasionally, if more detailed information is required,
the customer's call is transferred directly to Innotrac. Innotrac generally
ships the order the next day and on a monthly basis electronically submits to
the RBOC client the appropriate charges to be included on the customer's
telephone bill. Innotrac also provides the customer with order status, billing
information and technical product support through its call center by interactive
voice response ("IVR") or representative. Since November 1998, the Company has
established with all its RBOC clients a billing system whereby the Company bills
the RBOC directly for Caller ID units sold. The RBOCs now assume the credit
risk of Caller ID purchasers and provide any financing. Prior to then, Innotrac
derived its fees for sales of Caller ID equipment for its most significant
telecommunications client, BellSouth, from the difference in the price of the
Caller ID display unit charged to the customer and the wholesale cost of the
product.
E-COMMERCE SERVICES
The Company intends to leverage its core competencies of product
distribution, marketing, technology, and after-sale support services to business
enterprises to become their one-stop source for
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product distribution via the Internet. As acceptance of e-commerce grows,
Innotrac will offer a turnkey solution to companies seeking to outsource e-
commerce distribution. The Company has an on-staff web design team capable of
developing web pages to facilitate e-commerce. Innotrac offers web hosting for
its smaller e-commerce clients. As smaller clients grow, and for larger clients,
the Company may outsource this function to one of several approved web hosting
partners. Innotrac uses state-of-the-art shopping cart software along with
universal payment processing software to manage the e-commerce distribution
process. The Company may purchase for sale the offered product, presenting a
unique value-added service to e-commerce clients.
MARKETING SUPPORT SERVICES
Innotrac designs flexible marketing support solutions that range from
small, specialty projects to large integrated fulfillment, teleservicing and
database tracking project from among the following service options. Some of the
services described below are provided to the Company's RBOC clients, and may be
offered to potential e-commerce clients.
DISTRIBUTION SERVICES
TRADITIONAL PRODUCT AND LITERATURE FULFILLMENT. Innotrac is committed to
making its clients' products and services available to its customers on a timely
and accurate basis. Innotrac personnel process, pack and ship from the Company's
warehouses product orders and requests for promotional, technical and
educational literature, signage and point of sale materials for clients.
Clients may order such inventory by e-mail, through customized Internet
applications, EDI, telephone or facsimile. The Company ships orders so that the
product or literature reaches the client or its customer as it is needed ("just-
in-time"). Additional fulfillment services offered by the Company include (i)
customized product assembly, (ii) kit assembly, (iii) binder collation, (iv)
manifest delivery service systems, (v) shrink wrapping, (vi) weight verification
of materials and (vii) preparing, addressing, coordinating, sorting and mailing
materials. The Company streamlines and customizes the fulfillment procedures
for each client based upon the product and literature request, and the tracking,
reporting and inventory controls necessary to implement the marketing support
program.
VIRTUAL DISTRIBUTION. Innotrac can provide literature and publishing
fulfillment services through advanced delivery systems, such as fax-on-demand,
print-on-demand and virtual warehousing, which management believes will be the
industry norm in the near future. Management believes these services will speed
the delivery of important documents to a client or a client's customer at a much
lower cost than traditional literature fulfillment, and that increasing advances
in facsimile and printer technology will enable the quality of documents
provided through these services to equal or surpass current quality.
With fax-on-demand, a client or a client's customer calls a toll-free
number to reach the Company's IVR system, and instructs the system to deliver a
selected publication. The desired literature or marketing materials are then
quickly faxed to the customer. Print-on-demand solutions enable a client or the
client's customer to use its own computer system or telephone to place a print
order, including production amount and distribution method and location. The
Company then completes the print and distribution process using an electronic
file previously supplied or converted from a hard copy by the Company. Virtual
warehousing enables the client to print technical, educational or marketing
materials directly from Innotrac's computer system to its printers or its
customer's printers. Clients can reduce their shipping, labor, and warehousing
costs utilizing these virtual distribution services.
Other components of the Company's virtual distribution services include
broadcast fax and broadcast e-mail, which enable an Innotrac client to send
literature to a database of fax numbers or e-mail addresses. These services
allow a client to communicate with customers or sales personnel quickly,
efficiently and cost effectively.
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MANAGEMENT SERVICES
INVENTORY MANAGEMENT. An integral part of Innotrac's marketing support
services is the on-line tracking and control of a client's inventory. The
Company provides automated inventory management to assure real-time stock counts
of a client's products, sales, educational and technical literature, signage and
other items. These inventory management systems allow Innotrac and the client
to maintain consistent and timely reorder levels and supply capabilities and
also allow the client to assess quickly (i) current stock balances, (ii) year-
to-date receipts, (iii) monthly and yearly usage, (iv) reorder levels, (v)
pricing information and (vi) dollar value of inventory. The Company offers this
information to the client on a real-time basis via direct dial-up, through its
Internet gateway, or through EDI. Inventory management data is also utilized in
the Company's reporting services. See "`--Management Services--Reporting."
Innotrac also utilizes bar coding equipment in its inventory management systems,
which improves the efficiency of stock management and selection.
DATABASE MANAGEMENT. Innotrac can manage a client's databases
independently or in conjunction with other marketing support programs.
Independent database management begins with the client providing Innotrac with
the information to establish the database, which the Company then customizes,
manages, uses to provide reports to the client, and updates based upon
information supplied by the client. In addition, Innotrac's integrated
marketing support programs generate information about customers, demographics,
recurring technical problems and other matters. Innotrac compiles this
information into customized databases that evolve in conjunction with its on-
going marketing support and customer service programs. This data is a source of
valuable information to Innotrac and its clients in evaluating ongoing programs
and planning and designing future programs.
REPORTING. Innotrac provides reporting to support most of its services,
such as inventory analysis, program results and detailed order processing
information. Innotrac has developed flexible technologies and reporting
procedures that effectively convert raw data gathered during the course of a
marketing support program into useful, customized reports upon which clients and
Innotrac can base strategic decisions and more effectively respond to customer
needs and inquiries. For example, information obtained during a customer
telephone call is captured by the Company's database marketing and management
systems and is then incorporated into broader reports. These reports also are
used by Innotrac to ensure high quality performance. On-line functions allow
clients to monitor their programs in real-time to obtain comprehensive trend
analyses and modify program parameters as necessary. Innotrac provides clients
with customized reports in printed form, via the Internet, electronic mail,
computer-to-computer transmission, disk and magnetic tape. Innotrac also
provides cost-center based accounting reports for clients who utilize Innotrac's
services for subsidiary and intra-company fulfillment transactions.
LEAD MANAGEMENT. The Company offers lead management services as a means
for clients to identify, communicate with and sell their products to new
customers. For example, clients often place advertisements in magazines and
newspapers with toll-free numbers for prospective customers to call to receive
more information. Innotrac can answer these requests for information, establish
a database of prospective customers, send information, questionnaires or surveys
to the prospective customers (which helps to further screen the prospective
customer for a possible sales contact by Innotrac's client), and, once properly
screened, Innotrac can issue a sales lead to the appropriate sales
representative of the client. During this process, the Company tracks, analyzes
and provides full reporting to the client so that modifications or alterations
in the program can be made at any time.
PAYMENT PROCESSING. Innotrac manages client programs in which the Company
distributes invoices on behalf of its clients and collects, tracks and reports
for its clients amounts due to them. In
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addition, the Company provides services for clients in connection with credit
card, coupon and rebate processing.
INBOUND TELESERVICES
PRODUCT ORDERS. The Company's representatives in its call center process
orders with respect to items such as Caller ID display units and phone sets,
literature, signage, point-of-purchase materials, promotional items (caps,
shirts, pens, etc.) and video and audio tapes. Inbound teleservices are
generally commenced by a toll-free call from a client's customer that is
received by the Company, identified and routed to an Innotrac service
representative, who generally answers using the client's name. Orders for
Caller ID and other telecommunication products also occur as a result of an
Innotrac service representative offering products in connection with a customer
service or technical support call. To properly handle the call, Innotrac's
automated call distributors and digital switches identify each inbound call by
the toll-free number dialed and immediately route the call to an Innotrac
representative trained for that client's program and possessing the language
capabilities to deal with the customer. In some cases teleservices are offered
by IVR systems, which allow customers to route their calls by selecting from a
menu of offerings, and text to speech systems, which allow the IVR system to
"read" specific, real-time data from the client's databases and convert it into
speech based on cues from a caller. Such systems, which the Company expects
increasingly to utilize in the future, generally reduce personnel and physical
plant expenses associated with a call center and expand the operating
capabilities of the center.
Whether a customer's call is answered by a representative or one of the
Company's automated systems, the customer's needs are generally resolved with a
single call. The information and results of the call are then communicated to
appropriate personnel for order or additional processing and fulfillment or, if
Innotrac does not manage the client's inventory, the Company transmits the
customer's request directly to the client. Once an order is received,
Innotrac's automated systems allow representatives to track and update the
disposition of the order at any time through receipt by the customer.
TECHNICAL SUPPORT; CUSTOMER SERVICE. Innotrac service representatives
resolve complaints, diagnose and resolve product or service problems, and answer
technical questions for its client's customers. Technical support inquiries are
generally driven by a customer's purchase of a product or by a customer's need
for ongoing assistance. Customers of Innotrac's clients dial a support number
and are either connected with a trained Innotrac representative or an IVR
system. Innotrac's service representatives receiving a call can enter customer
information into the Company's call-tracking system, listen to a question, and
quickly access a proprietary network database via computer to answer a
customer's question. The IVR system attempts to resolve support issues by
guiding the customer through a series of interactive questions. If automatic
resolution by IVR cannot solve the problem, the call can be routed to one of
Innotrac's service representatives who is specially trained in the applicable
product. A senior representative is available to provide additional assistance
for complex or unique customer questions. As additional product information
becomes available over the course of the program, the Company promptly
integrates such information into its database, thereby ensuring that IVR and
representatives' answers are based upon the latest product information.
Frequently asked questions can also be integrated into IVR systems to bypass
representatives.
DEALER LOCATOR. Dealer locator services are offered both by IVR and
customer service representatives. Customers of Innotrac's clients, such as
NAPA, call a toll-free number to locate the closest dealer, store or distributor
office. By using the customer's zip code, Innotrac's software will search the
client database and offer the customer the address, phone number and directions
to the nearest location.
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TECHNOLOGY
Innotrac's use of advanced technology enables it to design and efficiently
deliver services for each client's marketing support needs. The Company's
information technology group ("IT Group") has developed the Company's database
marketing support and management systems, which utilize a UNIX-based open
architecture comprised of multiple networked computers and anchored by two
Hewlett-Packard HP9000 K460 multiprocessing systems. The Company is in the
process of deploying an Oracle-based supply chain software system, which
features a 4GL (4th Generation Language) technology that will allow for quick
and efficient changes to programs, systems and reports. This system will
standardize the Company's computer services and allow for even greater
flexibility and capacity.
The open architecture of the Company's computer system permits the Company
to seamlessly interact with many different types of client systems. The IT
Group uses this platform to design and implement application software for each
client's program, allowing clients to review their programs' progress on-line to
obtain real-time comprehensive trend analysis, inventory levels and order status
and to instantly alter certain program parameters. As the needs of a client
evolve, the IT Group works with the client to modify the program on an ongoing
basis. Information can also be exchanged via EDI, Internet access and direct-
dial applications. The Company believes that its technology platform is and
will be among the most advanced in the industry and provides the Company with
the resources to continue to offer leading edge services to current and new
clients. The Company believes that the integrity of client information is
adequately protected by its data security system and its off-site disaster back-
up storage facilities.
The Company's call center utilizes a sophisticated Rockwell Spectrum
Automatic Call Distributor ("ACD") switch to handle the Company's call
management functions. This ACD system has the capacity to handle 2,400
teleservice representatives simultaneously, and is currently supporting over 400
representatives simultaneously. Additionally, the ACD system is integrated with
software designed to enable management to automatically schedule teleservices
representatives based on call length and call volume data compiled by the ACD
system.
PERSONNEL AND TRAINING
Innotrac's success in recruiting, hiring and training large numbers of
skilled employees and obtaining large numbers of hourly employees during peak
periods for distribution and teleservice operations is critical to the Company's
ability to provide high quality marketing support services. Teleservice
representatives and fulfillment personnel receive feedback on their performance
on a regular basis and, as appropriate, are recognized for superior performance
or given additional training. To maintain good employee relations and to
minimize employee turnover, the Company offers competitive pay, hires primarily
full-time employees who are eligible to receive a full range of employee
benefits, and provides employees with clear, visible career paths.
As of January 31, 1999, the Company had 821 employees, of which
approximately 88% were full-time and 12% were part-time. Management believes
that the demographics surrounding its facilities, and its reputation, stability,
compensation and benefit plans should allow the Company to continue to attract
and retain qualified employees. The Company considers its employee relations to
be good.
COMPETITION
Innotrac competes on the basis of quality, reliability of service,
efficiency, technical superiority, speed, flexibility and price in tailoring
services to client needs. Management believes its comprehensive and integrated
services differentiate it from many of its competitors who may only be able to
provide one
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or a few of the services that Innotrac provides. The Company continuously
explores new outsourcing service opportunities, typically in circumstances where
clients are experiencing inefficiencies in non-core areas of their businesses
and management believes it can develop a superior outsourced solution to such
inefficiency on a cost-effective basis. The Company primarily competes with the
in-house operations of its current and potential clients and also competes with
certain companies that provide similar services on an outsourced basis, many of
whom have greater resources than the Company.
GOVERNMENT REGULATION
The Caller ID services offered by the Company's telecommunications clients are
subject to various federal and state regulations. The legality of Caller ID has
been challenged in cases decided under the Electronic Communications Privacy Act
(the "ECPA") and several state statutes. In March 1994, a Federal
Communications Commission ("FCC") report preempted certain state regulation of
interstate calling party number parameter ("CPN") based services, the technology
underlying Caller ID. This report requires certain common carriers to transmit
CPN and its associated privacy indicator (which allows telephone callers to
block the display of their phone numbers on Caller ID display units) on an
interstate call to connecting carriers without charge (the "Free Passage" rule).
In connection with this report, the Department of Justice issued a memorandum
which concluded that the installation or use of interstate Caller ID service is
not prohibited by any federal wiretap statute and that, in general, the FCC has
authority to preempt state laws that the FCC finds would hinder federal
communications policy on Caller ID services. Court decisions since the FCC
issued its March 1994 report have consistently held that Caller ID does not
violate any state or federal wiretap statute.
In May 1995, the FCC narrowed its March 1994 preemption of state public
utilities blocking regulations by permitting subscribers to choose per-line
blocking or per-call blocking on interstate calls, provided that all carriers
were required to adopt a uniform method of overriding blocking on any particular
call. At the same time, the FCC specifically preempted a California Public
Utilities Commission ("CPUC") per-line blocking default policy, which required
that all emergency service organizations and subscribers with nonpublished
numbers, who failed to communicate their choice between per-call blocking and
per-line blocking, be served with a per-line blocking.
The FCC's revised rules and regulations also require carriers to explain to
their subscribers that their telephone numbers may be transmitted to the called
party and that there is a privacy mechanism (i.e., the "blocking" feature)
available on interstate calls, and explain how the mechanism can be activated.
The CPUC, seeking to protect the caller's privacy, has ruled that a carrier can
offer Caller ID or transmit CPN to interconnecting carriers only upon CPUC
approval of its customer notification and education plan. The CPUC has approved
the education plan of Pacific Bell, whose Caller ID market includes California.
The Telecommunications Act of 1996 introduced restrictions on
telecommunications carriers' usage of CPNI. CPNI includes information that is
personal to customers, such as to whom, to where and when a customer places a
call, as well as the types of telecommunications services to which the customer
subscribes and the extent such services are used. The FCC interprets the CPNI
restrictions to permit telecommunications carriers, such as BellSouth, Pacific
Bell and US West, to use CPNI without customer approval to market services that
are related to the customer's existing service relationship with his or her
carrier. Before carriers may use CPNI to market services outside such customer's
existing service relationships, the carrier must obtain express customer
permission. Because the Company is dependent upon the efforts of its clients to
promote and market their equipment and services, laws and regulations inhibiting
those clients' ability to market such equipment and services to their existing
customers could have a material adverse effect on the Company's business,
results of operations and financial condition.
8
Telephone sales practices are regulated at both the federal and state level
and primarily relate to outbound teleservices, which Innotrac generally does not
provide. To the extent that Innotrac offers outbound teleservices, such
operations are regulated by the rules of the FCC under the Federal Telephone
Consumer Protection Act of 1991 (the "TCPA"), the Federal Telemarketing and
Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") and various state
regulations regarding telephone solicitations. The Company believes that it is
in compliance with the TCPA, the TCFAPA and the FCC rules thereunder and the
various state regulations and that it would operate in compliance with those
rules and regulations if it were to engage in more substantial outbound
teleservice operations in the future.
The Company works closely with its clients and their advisors to ensure
that the Company and the client are in compliance with such regulations. The
Company cannot predict whether the status of the regulation of Caller ID
services will change and what effect, if any, such change would have on the
Company or its industry.
INTELLECTUAL PROPERTY
The Company has used the service mark "Innotrac" since 1985 and has filed
applications for federal registration of this service mark in multiple classes.
The "innotrac.com" domain name has been a registered domain name since 1995.
Due to the possible use of identical or phonetically similar service marks by
other companies in different businesses, there can be no assurance that the
United States Patent and Trademark Office will grant the Company's registration
of its service mark, or that such service mark will not be challenged by other
users. The Company does not believe that it owns or utilizes any other service
marks that are material to its business. The Company's operations, however,
frequently incorporate proprietary and confidential information. In accordance
with industry practice, the Company relies upon a combination of contract
provisions and trade secret laws to protect the proprietary technology it uses
and to deter misappropriation of its proprietary rights and trade secrets.
9
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995). These statements concern the Company's operations, performance and
financial condition, including, in particular, the likelihood that Innotrac will
succeed in developing and expanding its business, among other things. They are
based upon a number of assumptions and estimates that are inherently subject to
significant uncertainties. Many of these uncertainties are beyond Innotrac's
control. Consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
set forth below.
INNOTRAC RELIES ON A SMALL NUMBER OF CLIENTS.
Innotrac focuses on developing long-term relationships with large
corporations. Therefore, a relatively small number of clients generate a
significant portion of its revenues. The Company's four largest clients,
BellSouth, Pacific Bell, Southwestern Bell and US West, accounted for an
aggregate of 90%, 95%, and 97% of net revenues for 1996, 1997 and 1998,
respectively. BellSouth alone accounted for 82%, 85% and 59% for those same
years. If the Company loses one or more of its largest clients, then Innotrac's
business, results of operations and financial condition could be materially
adversely affected. If such client is lost, the Company cannot assure that it
will be able to replace such clients with others that generate comparable
revenues or profits.
INNOTRAC'S TELECOMMUNICATIONS CLIENTS CAN TERMINATE THEIR AGREEMENTS WITH
INNOTRAC.
Certain of Innotrac's written agreements with telecommunications companies
have expired, including those with US West and Pacific Bell. Innotrac
currently provides services to certain clients pursuant to oral agreements.
These agreements can be terminated by either party at any time. If these
agreements are terminated, the Company's financial condition and results of
operations could be materially adversely affected. Innotrac is negotiating new
written agreements with these clients. It cannot assure, however, that it will
be able to obtain those agreements on favorable terms, or at all.
Innotrac has written agreements with other telecommunications clients,
including BellSouth and certain other clients. Those agreements are generally
terminable for cause. Some agreements provide for termination without cause on
short notice. The Company's agreement with BellSouth, which does not expire
until September 2003, may be terminated by BellSouth for any reason after
March 15, 2000 upon 120 days notice. Most of the Company's agreements do not
assure specific volume or revenue levels. In addition, Innotrac's contracts
generally do not provide that Innotrac will be the client's exclusive service
provider. See "Business--General" in this Item 1.
INNOTRAC FACES RISKS ASSOCIATED WITH BUYING AND WAREHOUSING PRODUCTS AND RENTING
PRODUCTS TO CUSTOMERS.
Innotrac purchases Caller ID and other telecommunications equipment from
third party vendors in connection with certain of its fulfillment services.
Consequently, the Company assumes the risks of inventory obsolescence, damage to
rented units and theft. Innotrac's business, results of operations and
financial condition could be materially adversely affected if it cannot manage
these risks. Innotrac took steps to reduce its credit risk in 1998 by
terminating direct-to-consumer billing arrangements with certain large
telecommunications clients. The Company now bills its clients for sales of
telecommunications equipment to their customers. Those clients are then
responsible for billing and collecting from the equipment end-user consumers.
The clients assume the risks associated with installment financing, among
others. Innotrac's allowance for bad debt was approximately $4.9 million at
December 31, 1998 compared with $5.7 million at December 31, 1997. See
"Business--General" in this Item 1.
10
INNOTRAC'S E-COMMERCE BUSINESS AND NEW PRODUCT FULFILLMENT SERVICES MAY NOT BE
SUCCESSFUL.
Innotrac is currently entering two new lines of business: (1) the provision
of services and products via the internet (electronic, or "e-commerce") and (2)
the sale and fulfillment of additional telecommunications products. The success
of Innotrac's new businesses depends upon, among other things, the Company's
ability to:
. recruit, hire and retain qualified personnel to assist in the new
businesses,
. integrate the new businesses into its existing lines and
. finance growth of these new businesses during their developmental stages.
Even if Innotrac successfully addresses these risks, the Company cannot assure
that it will successfully operate the new businesses. Nor can Innotrac assure
that the new businesses will be profitable. If these new businesses, or other
future ones, fail, the Company's business, financial condition or results of
operations could be materially adversely affected, particularly if significant
financing costs are not recouped.
E-COMMERCE
Innotrac's new e-commerce initiative is in a developmental stage. The
Company therefore cannot assure that its e-commerce services, when fully
developed, will be attractive to existing or new clients. It also cannot assure
that if demand for them does arise, they will be quickly profitable, if at all.
The Company expects to combine its existing product distribution, marketing
and after-sale-support services with front-end services such as order and
payment processing via the Internet. At this time however the Company cannot
predict the products or clients that may be involved in the e-commerce line, or
the other services Innotrac may offer. Innotrac has not previously offered any
services closely related to e-commerce. E-commerce is a relatively new and
highly competitive industry. The Company's potential competitors could be
located anywhere in the world. They range in size and sophistication from the
smallest niche companies and even individuals, to large corporations.
NEW TELECOMMUNICATIONS PRODUCTS
Innotrac has begun or is seeking to fulfill orders for other
telecommunications products such as cable modems and asymmetric digital
subscriber line modems. Both products are relatively new technologies that
facilitate high-speed data tranmission. The Company cannot assure that these
products or other new ones will achieve high acceptance or market penetration.
Nor can Innotrac assure that competing technologies will not replace these
products. Although the sale and fulfillment of these new products is closely
related to its established Caller ID equipment sale and fulfillment services,
the Company cannot assure that it will successfully integrate these new
fulfillment programs with its existing business.
These products compete with each other and with other existing technologies
and services. Many of these technologies and services are offered by the
Company's large telecommunications clients. Potential competing services and
technologies include telephone company-related wireline technologies such as
traditional analog modems and integrated services digital network modems.
11
THE MARKET FOR TELECOMMUNICATIONS PRODUCTS MAY CHANGE.
Caller ID is a relatively recent offering by telecommunications companies.
Innotrac cannot assure that it will gain or sustain wide acceptance in the
marketplace. The Company also depends on the level of resources (financial and
otherwise) its clients expend to promote Caller ID service. Innotrac cannot
assure that its telecommunications clients will sufficiently promote, or
continue to promote, Caller ID service in their areas. The Company's business,
results of operations and financial condition could be materially adversely
affected if Caller ID does not gain or sustain marketplace acceptance or if the
Company's RBOC clients fail to adequately promote Caller ID service.
Furthermore, the Company cannot assure that its telecommunications clients
will achieve their estimated "market penetration" (the percentage of consumer
telephone lines capable of receiving Caller ID services that actually receive
such services) goals. Innotrac partly plans its operations based on these
estimates. In addition, at some time in the future, the Company's clients may
achieve peak market penetration for Caller ID service. Caller ID service or
equipment may eventually be replaced by a different service or hardware.
Innotrac's business, results of operations and financial condition could be
materially adversely affected if penetration estimates prove optimistic, if peak
penetration is achieved or if new technologies supplant Caller ID.
In addition, both federal and state governments regulate the provision of
Caller ID services by telecommunications companies. Regulatory changes could
increase Innotrac's compliance and other costs, detrimentally impacting its
business, results of operations and financial condition. See the factor
captioned "Innotrac's business is subject to government regulation" below and
"Business--Government Regulation" in this Item 1.
INNOTRAC MAY NOT BE ABLE TO CONTINUE OR MANAGE GROWTH.
Innotrac's operations have grown significantly in recent years. The
Company's business, results of operations and financial condition could be
materially adversely affected if it cannot effectively manage its growth. The
Company's continued success depends upon its ability to:
. initiate, develop and maintain existing and new client relationships,
. respond to competitive developments,
. develop its sales infrastructure,
. attract, train, motivate and retain management and other personnel and
. maintain the high quality of its services.
In addition, Innotrac recently entered into a long-term lease for a new
facility, which will increase lease expenses by approximately $400,000 per year.
The Company expects that its continued rapid growth will significantly strain
its management, operations, employees and resources. Innotrac cannot assure
that it will be able to:
. maintain or accelerate its current growth,
. effectively manage our expanding operations or
. achieve planned growth on a timely or profitable basis.
12
THE TREND TOWARD OUTSOURCING MAY STOP OR REVERSE ITSELF.
The Company believes that in the past several years there has been a
significant increase in the number of businesses outsourcing services not
directly related to their core competencies. The Company's business, results of
operations and financial condition could be materially adversely affected if the
outsourcing trend declines, reverses or suffers other adverse developments.
Innotrac cannot assure that this trend will continue, that it will not reverse
or that corporations will not bring previously outsourced functions back in-
house. Particularly during general economic downturns, continued outsourcing of
services could result in layoffs. Businesses may bring in-house previously
outsourced functions to avoid or delay layoffs. See "Business--Strategy" in
this Item 1.
INNOTRAC MAY NOT BE ABLE TO RECRUIT, HIRE, TRAIN OR RETAIN ENOUGH QUALIFIED
EMPLOYEES, AND ITS EMPLOYMENT-RELATED COSTS MAY RISE.
Innotrac's success depends largely on its ability to recruit, hire, train
and retain qualified employees. If the Company cannot recruit, hire, train and
retain qualified employees, its business, results of operations or financial
condition could be materially adversely affected. Innotrac's industry is very
labor- intensive and has experienced high personnel turnover. If the Company's
employee turnover rate increases significantly, its recruiting and training
costs could rise and its operating effectiveness and productivity could
correlatively decline. Also, adding significant new clients or implementing new
large-scale marketing support programs may require accelerated recruiting,
hiring and training of qualified personnel. Some of Innotrac's operations,
particularly its technical support and customer service, require specially
trained personnel. The Company cannot assure that it will be able to continue
to hire, train and retain sufficient qualified personnel to adequately staff new
marketing support programs. In addition, the unemployment rate in the area
Innotrac's facilities are located is relatively low, potentially making it more
difficult and costly to hire and train qualified personnel.
Currently, the Company is not a party to any collective bargaining
agreements. None of the Company's employees are unionized. Although the
Company considers its relationship with its employees to be good, there have
been periodic unionization initiatives at the Company, particularly among its
call center personnel. If some or a majority of Innotrac's employees were to
join unions, the Company could incur increased wages, employee benefits and
employment-related administrative costs. The Company could also experience an
increased risk of work stoppages. A significant portion of Innotrac's operating
expenses relate to labor costs. Therefore, an increase in wages, costs of
employee benefits or employment taxes could materially adversely affect the
Company's business, results of operations or financial condition.
INNOTRAC'S SOFTWARE CONVERSION MAY NOT BE SUCCESSFUL OR IT MAY BE DELAYED.
Innotrac's business depends highly on its computer and telecommunications
equipment and software systems. The Company is upgrading certain computer
hardware and software. As a result, Innotrac is converting certain existing
programs to the new system. If Innotrac cannot successfully convert these
programs, its business, results of operations and financial condition could be
materially adversely affected. Innotrac has experienced delays and difficulties
in converting its software. The Company cannot assure that it can effectively
or efficiently convert its programs to the new system.
13
INNOTRAC MAY NOT BE ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY.
The Company's success depends highly upon its ability to:
. enhance existing services and develop applications to focus on its
clients' needs and
. introduce new services and products to respond to changing
technological developments.
If the Company fails to maintain its technological capabilities or respond
effectively to technological changes, its business, results of operations and
financial condition could be materially adversely affected. Innotrac cannot
assure that it will select, invest in and develop new and enhanced technology on
a timely basis in the future in order to meet its clients' needs and maintain
competitiveness. See "Business--Technology" in this Item 1.
INNOTRAC FACES COMPETITION.
Innotrac competes in highly competitive markets, and expects competition to
persist and intensify in the future. Innotrac's competitors include:
. in-house operations of its current and potential clients,
. small firms offering specific services and
. large marketing support services firms.
A number of Innotrac's competitors have or may develop financial and other
resources greater than the Company's. The Company cannot assure that additional
competitors with greater name recognition and resources will not enter its
markets. Innotrac's existing or potential clients' in-house operations are also
significant competitors. If (1) existing clients decide to provide, in-house,
services that currently are outsourced or (2) potential clients retain or
increase their in-house capabilities, then the Company's performance and growth
could be negatively impacted.
Some products Innotrac sells and fulfills for some clients, such as cable
modems, may compete with products and services offered by other clients. If a
large client discontinues its relationship with Innotrac because it provides
services to one of the client's competitors, the Company's business, financial
condition or results of operations could suffer material adverse effects.
Further, Innotrac's business will be materially adversely affected if a
large client decides to consolidate its outsourced services with a company other
than Innotrac. In addition, competitive pressures from current or future
competitors could result in significant price erosion, which could in turn
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Competition" in this Item 1.
INNOTRAC'S OPERATING RESULTS AND QUARTERLY RESULTS MAY FLUCTUATE.
The Company's operating results have fluctuated in the past and will
fluctuate in the future based on many factors. These factors include, among
other things:
14
. fluctuations in the general economy . increased competition
. changes in operating expenses . expenses related to acquisitions
. changes in the timing and level of . the potential adverse effect of
client-specific marketing programs acquisitions
Due to these and any unforeseen factors, it is likely that in some future
quarter Innotrac's operating results will be below the expectations of public
market analysts and investors. If that occurs, the Company's common stock price
would likely decline materially. In view of the its recent significant growth,
the Company believes that period-to-period comparisons of its financial results
are not necessarily meaningful, and you should not rely on them as an indication
of future performance.
INNOTRAC DEPENDS ON A FEW KEY PERSONNEL.
Innotrac depends in large part on the abilities and continuing efforts of
its executive officers and senior management. The Company's business and
prospects could be materially adversely affected if (1) current officers and
managers do not continue in their key roles and Innotrac cannot attract and
retain qualified replacements or (2) Innotrac cannot attract and retain
additional qualified personnel to sustain growth. The Company does not have
employment agreements with its executive officers and cannot assure that it will
be able to retain them. The Company maintains key man life insurance on only
one of its executive officers--Scott D. Dorfman, in the amount of $3.5 million.
In order to support growth, Innotrac must effectively recruit, develop and
retain additional qualified management personnel. The Company cannot assure
that in the future it will be able to recruit and retain additional qualified
managers.
INNOTRAC MAY LOSE REVENUE OR INCUR ADDITIONAL COSTS BECAUSE OF THE YEAR 2000
ISSUE.
INNOTRAC MAY NOT ADEQUATELY ADDRESS THE YEAR 2000 ISSUE.
The efficient operation of Innotrac's business depends in part on its
computer software programs and operating systems. If these programs and systems
suffer failures from their inability to recognize dates after December 31, 1999
(that is, if they are not "Year 2000 compliant"), the Company's business,
financial condition or results of operations could be materially adversely
affected. These programs and systems are used in:
. inventory management . pricing
. sales . shipping
. financial reporting . administrative functions
Innotrac believes that the Company's information technology ("IT") systems,
including the existing systems and programs that will be replaced as a part of
an upgrade of the Company's system architecture, and other non-IT systems are
either Year 2000 compliant or will be compliant by June 30, 1999 after applying
vendor-supplied patches or upgrades to these systems. Innotrac could experience
business interruptions and systems failures that could materially adversely
affect its business if (1) any of these remedial efforts fail to eliminate Year
2000 problems in Innotrac's IT and non-IT systems or if (2) Innotrac fails to
identify all systems that require attention. If unforeseen failures do occur,
emergency remediation expenses could also have a materially adverse effect on
the Company's business, results of
15
operations or financial condition. The Company anticipates completing an
evaluation of its Year 2000 efforts in September 1999. Innotrac cannot assure,
however, that its Year 2000 efforts will be completed before December 31, 1999.
It also cannot assure that these efforts, if completed, will successfully
remediate all Year 2000 problems.
INNOTRAC'S SUPPLIERS, CLIENTS, FINANCIAL INSTITUTIONS AND OTHERS MAY NOT
ADEQUATELY ADDRESS THE YEAR 2000 ISSUE.
Innotrac also depends on the efficient operation of the computer systems of
suppliers, clients, financial institutions and others which interface with its
own systems. Because such third-party systems or software may not be Year 2000
compliant, Innotrac may incur unanticipated expenses to remedy any problems
caused by such failures. These problems could in turn materially adversely
affect Innotrac's business, results of operations and financial condition. The
Company is obtaining documentation from third parties concerning their Year 2000
compliance programs and the possibility of any Year 2000-related interface
difficulties that may affect Innotrac. To date, no significant concerns have
been identified. Innotrac is developing contingency plans to address Year 2000
failures of these entities. However, Year 2000-related operating problems or
expenses may arise in connection with Innotrac's systems' interface with the
computer systems and software of its suppliers, clients, financial institutions
and others.
INNOTRAC'S BUSINESS IS SUBJECT TO GOVERNMENT REGULATION.
Because its current teleservicing business consists primarily of responding
to inbound telephone calls, as opposed to outbound calls, the Company is not
highly regulated. However, in connection with the limited amount of outbound
telemarketing services that it provides, the Company must comply with the
Federal Communications Commission's rules under the Federal Telephone Consumer
Protection Act of 1991 and the Federal Trade Commission's regulations under the
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both
of which govern telephone solicitation. If the Company expands its outbound
telemarketing services, such rules and regulations would apply to a larger
percentage of its business. Furthermore, there may be additional federal and
state legislation or changes in regulatory implementation, including
interpretations under the Telecommunications Act of 1996 restricting the ability
of telecommunications companies to use consumer proprietary network information
("CPNI"), that may limit the Company's activity or its clients' in the future or
significantly increase compliance costs. Additionally, Innotrac could be
responsible for failing to comply with regulations applicable to its clients.
If unfavorable federal or state legislation or regulations affecting Caller ID
service are adopted, the Company's business, financial condition and results of
operations could be materially adversely affected. See "--Risks Associated with
Product-Based Marketing Support Services" and "Business--Government Regulation"
in this Item 1.
COMPLETING AND INTEGRATING ACQUISITIONS MAY BE DIFFICULT.
As part of its strategy, the Company plans to pursue strategic
acquisitions. For acquisition candidates, Innotrac seeks companies offering
services, products, technologies, industry specializations or geographic
coverage that extend or complement its existing business. The Company cannot
assure however that it will be able to successfully identify, acquire on
favorable terms or integrate such companies. If Innotrac completes an
acquisition, it cannot assure that such acquisition will enhance its business,
results of operations or financial condition. In the future, the Company may
face increased competition for acquisition candidates, which may inhibit the
consummation of suitable acquisitions on favorable terms. Innotrac could use a
portion of its capital resources and proceeds from its initial public
16
offering for acquisitions. Innotrac may require additional debt or equity
financing for future acquisitions. Additional financing however may not be
available on favorable terms, or at all.
EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Scott D. Dorfman........... 41 President, Chief Executive Officer and
Chairman of the Board
David L. Ellin............. 40 Senior Vice President and Chief Operating
Officer
Donald L. Colter, Jr....... 38 Vice President--Operations
Larry C. Hanger............ 44 Vice President--Business Development
John H. Nichols, III....... 44 Vice President, Chief Financial Officer and
Secretary
Stephen J. Walden.......... 55 Vice President--Electronic Commerce
Mr. Dorfman is the founder of Innotrac and has served as President, Chief
Executive Officer and Chairman of the Board of the Company since its inception
in 1984. Prior to founding the Company, Mr. Dorfman was employed by Paymaster
Checkwriter Company, Inc. ("Paymaster"), an equipment distributor. At
Paymaster, Mr. Dorfman gained experience in distribution, tracking and inventory
control by developing and managing Paymaster's mail order catalog.
Mr. Ellin joined Innotrac in 1986 and has served as Senior Vice President
and Chief Operating Officer of the Company since November 1997. He served as
the Company's Vice President from 1988 to November 1997. From 1984 to 1986, Mr.
Ellin was employed by the Atlanta branch of WHERE Magazine, where he managed the
sales and production departments. From 1980 to 1984, Mr. Ellin was employed by
Paymaster, where he was responsible for Paymaster's sales and collections.
Mr. Colter joined Innotrac in 1995 and has served as Vice President-
Operations since November 1997. He served as the Company's Chief Financial
Officer from 1995 to November 1997. Prior to joining Innotrac, Mr. Colter was
from 1993 to 1995 the corporate controller of Gay & Taylor/Thomas Howell Group,
an international insurance adjusting company. From 1991 to 1993, Mr. Colter was
corporate controller of Outdoor West, Inc., an outdoor advertising company. Mr.
Colter is a certified public accountant and has over 15 years of experience in
the financial and accounting industry.
Mr. Hanger joined Innotrac in 1994, and has served as Vice President-
Business Development since November 1997. He served as the Company's Department
Manager of Business Development from 1994 to November 1997, and was responsible
for the management of the telecommunication equipment marketing and service
business. From 1979 to 1994, Mr. Hanger served as Project Manager-Third Party
Marketing at BellSouth, where he managed the marketing program for BellSouth's
network services and was involved in implementing the billing options program
for BellSouth with Innotrac.
17
Mr. Nichols joined Innotrac in November 1997 as Vice President and Chief
Financial Officer and was appointed Secretary of the Company in July 1998. From
1993 until November 1997 he served as Vice President and Chief Financial Officer
for Storehouse, Inc., a furniture retailer. From 1982 until 1993, Mr. Nichols
was employed by Contel Corporation and GTE Corporation in various senior
financial management positions in both the telephone and cellular telephone
business units. Mr. Nichols is a certified public accountant.
Mr. Walden joined Innotrac in January 1999 as Vice President-Electronic
Commerce. He had previously served as Senior Vice President for Internet
Strategy at Premiere Technologies, responsible for managing a new, Internet-
based product line integrating telephony services with Internet technology.
Prior to that, he was Vice President of Content and Commerce for BellSouth.net,
a BellSouth subsidiary. Mr. Walden has been President of Walden Associates, a
media and technology consulting group. Earlier in his career, he held positions
in Prodigy Services Company, Grey Advertising, Warner Amex Cable Communications,
Time Inc.'s Manhattan Cable TV, and Home Box Office.
ITEM 2. PROPERTIES
Innotrac's headquarters and distribution facilities are located in 250,000
square feet of leased space in Duluth, Georgia. The Company's corporate offices
occupy 50,000 square feet of this facility and the remaining 200,000 square feet
is distribution space. This site also includes approximately 3.5 acres that will
be available for the Company's expansion requirements. The Company's lease for
its Duluth facility has a term of 10 years and two five year renewal options.
The lease provides for an option to purchase the facility at the end of the
first five years of the term or at the end of the first 10 years of the term.
The Company has not yet determined whether to exercise such purchase option.
Innotrac provides teleservices through its call center located in Duluth,
Georgia, which opened in June 1996. The call center is currently configured with
446 workstations and has room to expand to approximately 700 workstations. It
also contains approximately 18,000 square feet of expansion space. It currently
operates from 8:00 a.m. until midnight Monday through Friday and from 9:00 a.m.
to 8:00 p.m. on Saturday.
The Company believes that its facilities are adequate for its needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company may be involved from time to time in litigation arising in the
normal course of business. The Company is not a party to any material legal
proceeding. The Company is, from time to time, a party to litigation arising in
the normal course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this Report.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock began trading on the Nasdaq National Market
("NASDAQ") under the symbol "INOC" on May 7, 1998. Prior to that time, there
was no trading market for the Common Stock. The following table sets forth for
the periods indicated the high and low sales prices of the Common Stock on the
NASDAQ.
HIGH LOW
---- ---
1998
Second Quarter (beginning May 7, 1998)..................... $13.250 $ 8.875
Third Quarter.............................................. $13.500 $ 6.750
Fourth Quarter............................................. $24.375 $ 5.750
Fiscal Year Ended December 1999............................ $24.375 $ 5.750
1999
First Quarter (through March 18)........................... $19.000 $10.000
The approximate number of holders of record of Common Stock as of March 4,
1999 was 22.
The Company has never declared cash dividends on the Common Stock. The
Company intends to retain its earnings to finance the expansion of its business
and does not anticipate paying cash dividends in the foreseeable future. Any
future determination as to the payment of cash dividends will depend upon such
factors as earnings, capital requirements, the Company's financial condition,
restrictions in financing agreements and other factors deemed relevant by the
Board of Directors. The payment of dividends by the Company is restricted by its
revolving credit facility.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "Selected Financial Data" in
the Company's 1998 Annual Report to Shareholders, filed as an exhibit hereto, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1998
Annual Report to Shareholders, filed as an exhibit hereto, is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quantitative and
Qualitative Disclosures About Market Risk" in the Company's 1998 Annual Report
to Shareholders, filed as an exhibit hereto, is incorporated herein by
reference.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the headings "Report of Independent Public
Accountants" and "Consolidated Financial Statements and Notes to the
Consolidated Financial Statements" in the Company's 1998 Annual Report to
Shareholders, filed as an exhibit hereto, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the heading "Election of Directors" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 1999 Annual Meeting of Shareholders, filed with the
Commission, is hereby incorporated herein by reference. Pursuant to Instruction
3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the
executive officers of the Company is included in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 1999 Annual Meeting of Shareholders, filed with the
Commission, is hereby incorporated herein by reference. The information
contained in the Proxy Statement under the headings "Compensation Committee
Report on Executive Compensation" and "Stock Performance Graph" shall not be
deemed incorporated herein by such reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Voting Securities and
Principal Shareholders" in the definitive Proxy Statement used in connection
with the solicitation of proxies for the Company's 1999 Annual Meeting of
Shareholders, filed with the Commission, is hereby incorporated herein by
reference.
For purposes of determining the aggregate market value of the Company's
voting stock held by nonaffiliates, shares held by all current directors and
executive officers of the Company have been excluded. The exclusion of such
shares is not intended to, and shall not, constitute a determination as to which
persons or entities may be "affiliates" of the Company as defined by the
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 1999 Annual Meeting of Shareholders, filed with the
Commission, is hereby incorporated herein by reference.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
The following financial statements and notes thereto are incorporated
herein by reference in Item 8 of this Report.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997, and 1996
Consolidated Statements of Partners', Members' and Shareholders' Equity for
the years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants as to Schedules
Schedule II - Valuation and Qualifying Accounts
21
3. EXHIBITS
The following exhibits are required to be filed with this Report by Item
601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 11,
1998)
3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (Commission File No. 333-42373), filed with the
Commission on December 16, 1997)
4.1 Form of Common Stock Certificate of the Company (incorporated by
reference to Exhibit 4.1 to the Company's Amendment No. 1 to
Registration Statement on Form S-1 (Commission File No. 333-
42373), filed with the Commission on February 11, 1998)
4.2 Rights Agreement between Company and Reliance Trust Company as
Rights Agent, dated as of December 31, 1997 (incorporated by
reference to Exhibit 4.2 to the Company's Amendment No. 1 to
Registration Statement on Form S-1 (Commission File No. 333-
42373), filed with the Commission on February 11, 1998)
10.1 Acquisition Agreement by and among the Company, SellTel #1, Inc.,
RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel
Providers Inc., Rentel #2, L.L.C., SellTel #2, L.L.C., HomeTel
Providers Partners, L.P., ITC Service Company, Scott D. Dorfman,
Susan Mary Trotochaud, as Custodian For Bradley H. Dorfman, Brent
M. Dorfman and Jesse E. Dorfman, and Susan Mary Trotochaud, dated
December 15, 1997 (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (Commission File
No. 333-42373), filed with the Commission on December 16, 1997)
10.2(a) Stock Option and Incentive Award Plan (incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on Form S-
1 (Commission File No. 333-42373), filed with the Commission on
December 16, 1997)+
(b) Amendment No. 1 to Stock Option and Incentive Award Plan
(incorporated by reference to Exhibit 10.2(b) to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 11,
1998)+
10.3 Amended and Restated Loan and Security Agreement by and among the
Company, HomeTel Systems Inc., IELC, Inc., RenTel #1, Inc., RenTel
#2, L.L.C., SellTel #1, Inc., SellTel #2, L.L.C., HomeTel
Providers Partners, L.P. and SouthTrust Bank, N.A., dated December
5, 1997 (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (Commission File No.
333-42373), filed with the Commission on December 16, 1997)
10.4 Purchase Agreement for Services between BellSouth
Telecommunications, Inc. and the Company, effective November 1,
1998*
22
10.5 Form of Indemnification Agreements entered into as of December 11,
1997, by and between the Company and each of Messrs. Scott D.
Dorfman, David L. Ellin, Donald L. Colter, Jr., John H. Nichols
III, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III
and William H. Scott, III (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1
(Commission File No. 333-42373), filed with the Commission on
December 16, 1997)+
10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and
the Company (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Commission File No.
333-42373), filed with the Commission on December 16, 1997)
10.8(a) Lease, dated December 8, 1997, by and between Weeks Development
Partnership and the Company (incorporated by reference to Exhibit
10.8 to the Company's Amendment No. 1 to Registration Statement on
Form S-1 (Commission File No. 333-42373), filed with the
Commission on February 11, 1998)
10.9 Split Dollar Life Insurance Agreement, dated July 10, 1997, by and
between the Company, Bruce V. Benator, as Trustee of The Scott
David Dorfman Family Trust #2, and Scott David Dorfman
(incorporated by reference to Exhibit 10.9 to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 11,
1998)+
10.10 Innotrac Corporation Deferred Compensation Plan, effective as of
October 16, 1997 (incorporated by reference to Exhibit 10.10 to
the Company's Amendment No. 1 to Registration Statement on Form S-
1 (Commission File No. 333-42373), filed with the Commission on
February 11, 1998)+
10.11 Grantor Trust Agreement dated October 16, 1997, by and between the
Company and Wachovia Bank, N.A. (incorporated by reference to
Exhibit 10.11 to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (Commission File No. 333-42373), filed with
the Commission on February 11, 1998)+
10.12 Shareholders' Agreement by and among SellTel #1, Inc., Arnold
Dorfman, Scott Dorfman and the Company, dated February 13, 1998
(incorporated by reference to Exhibit 10.12 to the Company's
Amendment No. 2 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 23,
1998)
10.13 Stock Redemption Agreement by and among RenTel #1, Inc., Scott
Dorfman and Arnold Dorfman, dated December 15, 1997 (incorporated
by reference to Exhibit 10.13 to the Company's Amendment No. 2 to
Registration Statement on Form S-1 (Commission File No. 333-
42373), filed with the Commission on February 23, 1998)
10.14 Amended and Restated Loan and Security Agreement between the
Company and SouthTrust Bank, N.A., dated January 25, 1999
23
10.15 1999 Senior Executive Incentive Compensation Plan+
10.16 Aircraft Lease by and between SD Holdings, Inc. and the Company,
dated February 19, 1998
13.1 Portions of the 1998 Annual Report to Shareholders that are
incorporated by reference in this Report
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule (for Commission use only)
99.1 Proxy Statement for the 1999 Annual Meeting of Shareholders
+ - Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
* - Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934. In accordance with Rule 24b-2, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the Registrant's 1998 fiscal year.
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited in accordance with generally accepted auditing standards, the
financial statements of INNOTRAC, CORPORATION included in this Form 10-K and
have issued our report thereon dated January 31, 1999. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the index is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 31, 1999
S-1
INNOTRAC CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning of Charged to Other End of
Description Period Expenses Accounts Deductions Period
- ----------- ------------ ---------- ---------- ---------- ----------
(in thousands)
Provision for uncollectible accounts
Year ended December 31,
1998................................ $5,058 $ 8,245 -- $ (8,797) $4,506
1997................................ 4,141 7,750 -- (6,833) 5,058
1996................................ 2,552 5,841 -- (4,252) 4,141
1995................................ 575 3,043 -- (1,066) 2,552
Provisions for returns and allowances
Year ended December 31,
1998................................ 649 11,104 -- (10,722) 1,031
1997................................ 101 6,327 -- (5,779) 649
1996................................ -- 3,536 -- (3,435) 101
1995................................ -- -- -- -- --
S-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 23rd day of
March, 1999.
INNOTRAC CORPORATION
By: /s/ Scott D. Dorfman
----------------------
Scott D. Dorfman
Chairman and
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Scott D. Dorfman and John H. Nichols, III and
either of them, as attorneys-in-fact, with power of substitution, for him in any
and all capacities, to sign any amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 23rd day of March, 1999.
Signature Title
- --------- -------
/s/Scott D. Dorfman President, Chief Executive Officer and
- ---------------------------
Scott Dorfman Chairman of the Board (principal executive
officer)
/s/David L. Ellin Senior Vice President, Chief Operating
- ---------------------------
David L. Ellin Officer and Director
/s/Larry C. Hanger Vice President--Business Development and
- ---------------------------
Larry C. Hanger Director
/s/John H. Nichols, III Vice President, Chief Financial Officer and
- ---------------------------
John H. Nichols, III Secretary (principal financial and
accounting officer)
/s/Bruce V. Benator Director
- ---------------------------
Bruce V. Benator
/s/Martin J. Blank Director
- ---------------------------
Martin J. Blank
/s/Campbell B. Lanier, III Director
- ---------------------------
Campbell B. Lanier, III
/s/William H. Scott, III Director
- ---------------------------
William H. Scott, III
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
10.4 Purchase Agreement for Services between BellSouth
Telecommunications, Inc. and the Company, effective November 1,
1998*
10.14 Amended and Restated Loan and Security Agreement between the
Company and SouthTrust Bank, N.A., dated January 25, 1999
10.15 1999 Senior Executive Incentive Compensation Plan+
10.16 Aircraft Lease by and between SD Holdings, Inc. and the Company,
dated February 19, 1998
13.1 Portions of the 1998 Annual Report to Shareholders that are
incorporated by reference in this Report
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for Commission use only)
99.1 Proxy Statement for the 1999 Annual Meeting of Shareholders
+ - Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
* - Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934. In accordance with Rule 24b-2, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.