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DRAFT
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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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 (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.
Name of each exchange on which registered: The Nasdaq National Market.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.10 Per Share.
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 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 10-K. [ ]
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 20, 2001 was $32,398,431 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 20, 2001, there were 11,364,595 shares of Common Stock, par
value $0.10 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2000 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, 2000 (the "Report").
Portions of the Registrant's definitive Proxy Statement for the 2001 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.
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TABLE OF CONTENTS
PAGE
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PART I....................................................................................................... 2
ITEM 1. BUSINESS................................................................................... 2
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS....................................... 8
EXECUTIVE OFFICERS OF REGISTRANT........................................................... 13
ITEM 2. PROPERTIES................................................................................. 14
ITEM 3. LEGAL PROCEEDINGS.......................................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 15
PART II...................................................................................................... 16
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.................. 16
ITEM 6. SELECTED FINANCIAL DATA.................................................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 17
PART III..................................................................................................... 18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 18
ITEM 11. EXECUTIVE COMPENSATION..................................................................... 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 18
PART IV...................................................................................................... 19
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................ 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES................................... S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............................................ S-2
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PART I
ITEM 1. BUSINESS
Innotrac provides customized, technology-based marketing support,
fulfillment, call center and total customer relationship management services to
large corporations that outsource these functions. In order to perform marketing
support, call center and fulfillment functions in-house, a company may be
required to develop expensive, labor intensive infrastructures, which may divert
its resources and management's focus from its principal business. By assuming
responsibility for these tasks, we strive to improve the quality of the non-core
operations of our clients and to reduce their overall operating costs. We enable
our clients to manage their sales channels efficiently by utilizing our core
competencies, which include:
- Technology services:
- electronic data interface, or EDI, integration
- interactive voice response, or IVR
- chat box capabilities
- database management and data warehousing
- integration into clients systems
- full shopping cart, credit card processing
- inventory and customer service integration
- billing services
- Fulfillment services:
- sophisticated warehouse management technology
- automated shipping solutions
- real-time inventory tracking and order status
- purchasing and inventory management
- channel development
- promotions and coupons
- Customer support services:
- inbound call center services
- technical support and order status
- returns and refunds processing
- call centers integrated into fulfillment platform
We receive most of our clients' orders either through electronic data
interchange ("EDI") or the internet. On a same day basis, depending on product
availability, the Company picks, packs and ships the item, tracks inventory
levels through an automated, integrated perpetual inventory system, warehouses
data and handles customer support and technical inquiries.
Since 1994, we have had a high focus on the telecommunications industry
because of its growth characteristics and increasing marketing needs. We provide
marketing support services and fulfillment of telephones, Caller ID equipment,
Digital Subscriber Line Modems ("DSL modems") and other telecommunications
products to BellSouth, Pacific Bell, Southwestern Bell,
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Ameritech and Qwest and their customers. Approximately 71% of our 2000 revenues
came from sales to BellSouth Telecommunications, Inc., Pacific Bell and
Southwestern Bell Telephone Co. and their customers, and an additional 9% was
from sales to Qwest Communications Services, Inc., Bell Atlantic Corporation and
Ameritech Services Inc. Pacific Bell, Southwestern Bell and Ameritech are all
subsidiaries of SBC Communications, Inc.
We believe that the flexibility of our services allows us to attract
clients in many industries. We have provided literature and point-of-sale
distribution for a number of years to companies in other industries, including
Home Depot U.S.A., Inc., Siemens Energy and Automation Inc. and National
Automotive Parts Association, or NAPA, amongst others, and we continue to
aggressively pursue additional business in this area.
The Company has converted its clients to a fee-for-service model. We no
longer purchase and sell Caller ID equipped telephones, DSL modems and other
telecommunications equipment from third party manufacturers for a majority of
our clients. Instead, we warehouse products on a consignment basis and fulfill
equipment on behalf of our customers for a fee. In certain cases, we purchase
and own inventory, but on a significantly reduced risk basis as a result of
client guarantees and contractual indemnifications. Management believes that
this new model will substantially reduce revenues as pass through cost of
purchased equipment will no longer be included in revenues; however, since the
Company will no longer have inventory risk or cost of equipment, gross margins,
and more importantly, operating cash flows should improve.
On May 17, 2000, the Company invested in a new venture, Return.com
Online, Inc. ("Return.com") with its equity partner, Mail Boxes Etc. ("MBE"), to
process product returns for online and catalog retailers. Return.com is the
first full-service returns portal supported by the convenience of 3,400 physical
locations. Customers returning merchandise purchased online, or by catalog or
phone, can simply take the item to any participating MBE location in the U.S.
for packaging and shipping. On December 28, 2000, Return.com was converted to a
limited liability company. In March 2001, it was announced that United Parcel
Services, Inc. ("UPS") had entered into a definitive agreement to purchase MBE.
As a result of this agreement, MBE and Innotrac have begun discussions about the
future of Return.com under joint ownership. While the outcome is not currently
known, it is possible that Innotrac may obtain 100% ownership of Return.com in
the future and that the relationship with MBE may be terminated. Management does
not believe that this would have a material adverse effect on the Company's
future results of operations.
In December 2000, the Company, in an effort to expand its national
presence and create a national footprint, acquired Universal Distribution
Services, Inc. ("UDS"). UDS, located in Reno, Nevada, provides integrated order
processing, order management, fulfillment and customer relationship management
services. The acquisition was immediately accretive and added a 275,000 square
foot facility and 190 people to Innotrac's team. Moreover, we acquired new
clients that further diversified our client-base. UDS's customer base comprises
traditional direct marketing companies as well as retailers including Thane
International, Gateway Learning and Digital Convergence. We expect some of UDS's
clients to expand their business with us during 2001 by taking advantage of our
East Coast capabilities. We intend to continue our search for other selective
acquisitions during the course of 2001 to complete our national model.
We are committed to continued diversification of our client base. Our
long-term goal is to have our business mix spread evenly across a higher number
of clients in more diverse industries. We hired our first Vice President of
Sales to facilitate this objective by creating a professional team focused on
new, diversified client acquisition. We also formed strategic marketing
alliances with Manhattan Associates, eDeltaCom and Commerce One to help produce
leads for the team.
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MARKETING SUPPORT SERVICES
We design customized, technology-based marketing support solutions for
our clients. We act as an extension of our clients in reaching their end user
customers. Our full range of services are described below and can be offered to
clients who sell products and services through various sales channels.
TECHNOLOGY SERVICES
Our integrated technology solutions help us provide marketing support
services to our clients and create substantial barriers to entry for our
competitors. We provide the following technology-based services:
ELECTRONIC DATA INTERFACE INTEGRATION. We use EDI to link our systems
to our clients' systems, which permits the automatic exchange of information.
Our telecommunications clients generally transmit sales orders for telephones,
Caller ID equipment, DSL Modems and other products to us via EDI. We can also
provide sales, billing and individual customer order status updates to our
clients through EDI links. The open architecture of our systems facilitates
adapting our EDI capabilities to new clients and new marketing programs. We also
develop methods to allow clients without EDI capabilities to transmit their
order files to us through other methods.
SYSTEMS INTEGRATION. With some clients, we develop proprietary software
that provides direct integration between our system and theirs. This allows us
to exchange data, update customer records, place orders for products and
services and provide up-to-the-second inventory status. By developing an
integrated system interface with our clients, our systems and our clients act as
one and provide real-time, highly accurate data inquiries and updates. By
developing proprietary software for integration, we are able to maintain longer,
more consistent relationships with our largest clients.
INTERACTIVE VOICE RESPONSE. In many cases, our call center services are
offered through IVR systems. These menu driven systems allow customers to route
their calls by selecting from several offerings. Our IVR systems include text to
speech capabilities, which allow the IVR systems to "read" specific, real-time
data from the client's databases and convert it into speech based on cues from a
caller. These systems generally reduce personnel and physical plant expenses
associated with a call center while expanding the operating capabilities of the
center. Technical support is also integrated into our IVR systems so that an end
user can obtain answers to technical questions from an automated system, rather
than a call center representative, regarding the products they purchased.
DATABASE MANAGEMENT. We manage client databases independently or in
conjunction with other marketing support programs. Independent database
management begins with the client providing the information to establish the
database or our obtaining the data from a variety of sources. We then customize
and manage this data to provide client reports. Many times we will develop a
systems integration module that allows our system to fully integrate with our
clients' systems enabling the sharing of database files. In addition, our
integrated marketing support programs generate information about customers,
demographics, recurring technical problems and other useful marketing data. We
are then able to create customized databases that evolve with our ongoing
marketing support and customer service programs. This data is a source of
valuable information as we evaluate ongoing programs and plan and design future
programs with our clients.
FULFILLMENT SERVICES
Providing effective turnkey fulfillment solutions for our clients'
products and services is another of our core competencies and has been a key
component in our revenue growth. Our capabilities in this area are described
below:
FULFILLMENT. We are committed to offering our clients' products and
services to their customers on a timely and accurate basis. Our personnel pick,
pack and ship product orders and requests for promotional, technical and
educational literature, signage and point of sale materials for clients. We use
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several custom-designed, semi-automated packaging and labeling lines to pack and
ship products. By utilizing this technology, we are able to reduce labor costs
and provide more timely shipments to our clients' customers. We streamline and
customize the fulfillment procedures for each client based upon the product
request and the tracking, reporting and inventory controls necessary to
implement that client's marketing support program. We also offer comprehensive
product return services whereby our personnel receive, log, test, repackage and
dispose of products that are returned from end-users.
PURCHASING MANAGEMENT. For selective clients, we place orders for
products we fulfill with vendors chosen by those clients. Our purchasing
management services include assisting a client in negotiating product pricing
with the vendor, arranging returns and credits as well as forecasting product
quantities required for normal business programs or promotions.
INVENTORY MANAGEMENT. An integral part of our marketing support
services is the on-line monitoring and control of a client's inventory. We
provide automated inventory management to assure real-time stock counts of a
client's products, literature, signage and other items. These inventory systems
enable us to provide management information to maintain consistent and timely
reorder levels and supply capabilities and also enable the client to quickly
assess stock balances, pricing information, reorder levels and inventory values.
We offer this information to the client on a real-time basis through our
internet gateway or direct system integration. Inventory management data is also
utilized in our reporting services. We utilize bar coding equipment in our
inventory management systems which improves the efficiency of stock management
and selection.
PRODUCT CONSIGNMENT AND WAREHOUSING. For a majority of our clients, we
no longer purchase and sell telephones, Caller ID equipment, DSL modems and
other telecommunications equipment from third party manufacturers. Instead, we
warehouse products on a consignment basis and fulfill equipment on behalf of our
customers for a fee. In certain cases, we may purchase and own inventory, but on
a significantly reduced risk basis as a result of client guarantees and
contractual indemnifications.
END USER CUSTOMER SUPPORT SERVICES
One of our core competencies is providing customer support services. We
believe these services are critical to a comprehensive marketing solution. Our
customer support services are described below:
INBOUND CALL CENTER SERVICES AND TECHNICAL SUPPORT. Our call center
representatives resolve questions regarding shipping, billing and technical
support as well as a variety of other questions. From time to time they may sell
equipment, telephone company services and extended warranties to customers who
call us.
Inquiries generally relate to a customer's purchase of a product or a
customer's need for ongoing assistance. These end users dial a support number
printed on the product or in the documentation accompanying the product. To
handle the call properly, Innotrac's automated call distributor identifies each
inbound call by the toll-free number dialed and immediately routes the call to
the IVR system or an Innotrac representative. The IVR system attempts to resolve
support issues by guiding the customer through a series of interactive
questions. If IVR automatic resolution cannot solve the problem, the call is
routed to one of our service representatives who is specially trained in the
applicable client's business and products and answer using the client's name.
Our call center representatives can enter customer information into our
call-tracking system, listen to a question and quickly access a proprietary
network database using a graphical interface to answer a customer's question. A
senior representative is available to provide additional assistance for complex
or unique customer questions. Customer requests are generally resolved with a
single call, whether answered by a trained representative or our automated
systems.
As additional product information becomes available over the course of
a marketing program, we promptly integrate this information into our database to
ensure that IVR and representatives' answers are based upon the latest product
information.
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RETURNS AND REFUNDS PROCESSING. The representatives respond to customer
calls about product returns and refunds and obtain information about customer
service problems. They facilitate a customer's return of a product by providing
a bar-coded label to the customer. When the returned item is processed and
entered into our system, it automatically triggers a pre-set action for
reshipment of a product or refund to the customer.
TECHNOLOGY
Our use of technology enables us to design and deliver services for
each client's marketing support needs. Our information technology group, or IT
Group, has developed our 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. We also have multiple Sun Enterprise 6500 servers utilizing Veritas
cluster server software which provides a high availability computing
environment. Veritas Backup software, DLT tape libraries and Oracle Hot backup
capabilities allow us to backup our production Oracle databases online without
interruption to the business unit. Our burstable bandwidth allows us to increase
data capacity in a matter of hours. Our EMC storage solutions provide rapid
access to data and the ability to scale quickly depending on business demands.
Network connectivity is achieved with high-end Cisco routers and local
directors.
The open architecture of our computer system permits us to seamlessly
interact with many different types of client systems. Our 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, our IT Group
works with our client services team to modify the program on an ongoing basis.
Information can be exchanged via direct system integration, EDI, internet access
and direct-dial applications. We believe that our technology platform provides
us with the resources to continue to offer leading edge services to current and
new clients and to integrate our systems with theirs. We believe that the
integrity of client information is adequately protected by our data security
system and our off-site disaster back-up facilities.
Our Duluth and Pueblo call centers utilize sophisticated Rockwell
Spectrum Automatic Call Distributor, or ACD, switches to handle call management
functions. These ACD systems have the combined capacity to handle 2,400 call
center representatives and are currently supporting over 470 representatives.
Additionally, the ACD systems are integrated with software designed to enable
management to automatically staff and supervise the call center based on call
length and call volume data compiled by the ACD system. Our call center in Reno
employs an InterTel switch with the capacity to handle 250 call center
representatives and is currently supporting 120 representatives.
PERSONNEL AND TRAINING
Our success in recruiting, hiring and training large numbers of
employees and obtaining large numbers of hourly employees during peak periods
for fulfillment and call center operations is critical to our ability to provide
high quality marketing support services. Call center 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,
we offer competitive pay, hire primarily full-time employees who are eligible to
receive a full range of employee benefits and provide employees with clear,
visible career paths.
As of March 12, 2001, we had over 950 employees, of which approximately
99% were full-time and 1% were part-time. Management believes that the
demographics surrounding our facilities and our reputation, stability,
compensation and benefit plans should allow us to continue to attract and retain
qualified employees.
Currently, we are not a party to any collective bargaining agreements.
None of our employees are unionized. Although we consider our relationship with
our employees to be good, we have experienced occasional unionization
initiatives, particularly among our call center personnel.
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COMPETITION
In tailoring services to client needs, we compete on the basis of
quality, reliability of service, efficiency, technical superiority, speed,
flexibility and price. We compete with many companies, some of which have
greater resources than us, with respect to various portions of our business.
Those companies include fulfillment businesses, call center operations and
database management firms. We believe that our comprehensive and integrated
services differentiate us from many of those competitors. We continuously
explore new outsourcing service opportunities, typically in circumstances where
clients are experiencing inefficiencies in non-core areas of their businesses
and management believes we can develop a superior outsourced solution on a
cost-effective basis. We primarily compete with the in-house operations of our
current and potential clients and also compete with certain companies that
provide similar services on an outsourced basis, many of whom have greater
resources than Innotrac.
GOVERNMENT REGULATION
The Caller ID services offered by our 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, or the ECPA, and several state statutes. In March 1994, a Federal
Communications Commission, or FCC, report preempted certain state regulation of
interstate calling party number parameter, or 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, or 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 customer proprietary network information,
or CPNI. CPNI includes information that is personal to customers, including
where, when and to whom a customer places a call, as well as the types of
telecommunications services to which the customer subscribes and the extent
these services are used. The FCC interprets the CPNI restrictions to permit
telecommunications carriers, including BellSouth, Pacific Bell and Qwest, 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 a customer's existing service
relationships, the carrier must obtain express customer permission. Because we
are dependent upon the efforts of our clients to promote and market their
equipment and services, laws and regulations inhibiting those clients' ability
to market these equipment and
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services to their existing customers could have a material adverse effect on our
business, results of operations and financial condition.
Telephone sales practices are regulated at both the federal and state
level. These regulations primarily relate to outbound teleservices, which we
currently outsource to another company. Outbound teleservices are regulated by
the rules of the FCC under the Federal Telephone Consumer Protection Act of
1991, the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 and various state regulations regarding telephone solicitations. We believe
that we are in compliance with these federal statutes and the FCC rules
thereunder and the various state regulations and that we would operate in
compliance with those rules and regulations if we were to engage in outbound
teleservice operations in the future.
We work closely with our clients, companies we outsource outbound
teleservices to and their respective advisors to ensure that we and our client
are in compliance with these regulations. We cannot predict whether the status
of the regulation of Caller ID services or e-commerce will change and what
effect, if any, this change would have on us or our industry.
INTELLECTUAL PROPERTY
We have used the service mark "Innotrac" since 1985 and have registered
it and other marks used by us in our business through the US Patent and
Trademark Office. The "innotrac.com" domain name has been a registered domain
name since 1995. We also own several other internet domain names. Due to the
possible use of identical or phonetically similar service marks by other
companies in different businesses, there can be no assurance that our service
marks will not be challenged by other users. Our operations frequently
incorporate proprietary and confidential information. In accordance with
industry practice, we rely upon a combination of contract provisions and trade
secret laws to protect the proprietary technology we use and to deter
misappropriation of our proprietary rights and trade secrets.
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.
WE RELY ON A SMALL NUMBER OF LARGE CLIENTS. IF WE LOSE ONE OR MORE OF OUR
LARGEST CLIENTS, OR IF REVENUES FROM OUR LARGEST CLIENTS DECLINE, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
Innotrac focuses on developing long-term relationships with large
corporations. In recent years, this focus has been on telecommunications
companies. A relatively small number of our clients account for a significant
portion of our revenues. Our three largest clients, BellSouth, Pacific Bell and
Southwestern Bell, accounted for an aggregate of approximately 95%, 90% and 71%
of net revenues for 1998, 1999 and 2000. Pacific Bell, Southwestern Bell and
Ameritech, which are all subsidiaries of SBC, accounted for an aggregate of 46%
in 2000. If we lose one or more of our largest clients, or if revenues from our
largest clients decline, then our business, results of operations and financial
condition could be materially adversely affected. Internal issues at BellSouth
did in fact slow Caller ID sales throughout 2000. Due to the recent resolution
of those particular internal issues at BellSouth, we believe that sales of
telecommunications products for BellSouth will significantly increase in the
second half of 2001.
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Additionally, if one of these large clients is lost, or revenues from our
largest clients decline, we cannot assure you that we will be able to replace or
supplement that client with others that generate comparable revenues or profits.
Our fulfillment service for Pacific Bell and Southwestern Bell concluded in
February 2001, but we were able to offset this with the pick-up of call center
and data management services provided to them.
OUR WRITTEN CONTRACTS GENERALLY DO NOT GUARANTEE SPECIFIC VOLUME LEVELS AND CAN
USUALLY BE TERMINATED ON LITTLE NOTICE.
Although we have written agreements with our telecommunications
clients, those agreements are generally terminable for cause. In addition, some
agreements provide for termination without cause on short notice. Our agreement
with BellSouth, which does not expire until September 2003, may be terminated by
BellSouth for any reason upon 120 days notice. Our agreement with SBC may be
terminated for any reason upon 60 days notice prior to July 1, 2004 and upon 120
days notice thereafter. Most of our agreements do not assure specific volume or
revenue levels. In addition, our contracts generally do not provide that we will
be the client's exclusive service provider.
IF THE MARKET FOR TELECOMMUNICATIONS PRODUCTS OR SERVICES CHANGES, OR THE NEW
DSL PRODUCTS WE ARE DISTRIBUTING DO NOT ACHIEVE MARKET SUCCESS, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
Our success depends upon our ability to fulfill advanced
telecommunications equipment. Currently, we rely heavily upon the fulfillment of
Caller ID equipped telephones and DSL modems to the end user customers of our
telecommunications clients for our revenues. We also depend upon these clients
to promote Caller ID and DSL services. We cannot assure you that we will be able
to continue to fulfill state-of-the-art telecommunications equipment. Our
business, results of operations and financial condition could be materially
adversely affected if:
- the telecommunications products we fulfill and the related
services offered by our clients do not gain or sustain
marketplace acceptance,
- our telecommunications clients fail to adequately promote
these products and services or
- our telecommunications clients lose market share.
Some of the products we fulfill compete with each other. Our current
telecommunications clients offer many of these technologies and services.
Potential competing services and technologies include telephone company-related
wireline technologies like traditional analog modems and integrated services
digital network modems. We cannot assure you that we will be able to obtain, or
retain, fulfillment service business from telecommunications companies with
competing products and technologies.
IF THE INTERNET FAILS TO CONTINUE TO GROW, SOME OF OUR CLIENTS MAY NOT SUCCEED
AND OUR BUSINESS MAY BE HARMED.
Commercial use of the internet is relatively new. Internet and
e-commerce usage may be inhibited for a number of reasons, including:
- increased government regulation,
- insufficient availability, reliability or capacity of
telecommunications services,
- security and authentication concerns,
- difficulty of access and
- inconsistent service quality.
We view e-commerce as another channel of distribution. Some of our
clients are dependent on the success of the internet either because they use
e-commerce as a channel for distribution or they distribute products that
facilitate internet usage. Recently, we lost some business due to unsuccessful
Internet Service Providers that utilized our service to distribute their DSL
modems. If the internet develops as a commercial medium more slowly than we
expect, it could adversely affect our business. If web usage grows more
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slowly or declines for any reason, we may experience an increase in our accounts
receivables and a decrease in revenues.
IF WE ARE NOT ABLE TO CONTINUE OR MANAGE OUR GROWTH, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
Our operations have grown significantly in recent years. Our business,
results of operations and financial condition could be materially adversely
affected if we cannot effectively manage our growth. Our continued success
depends upon our ability to:
- initiate, develop and maintain existing and new client
relationships,
- respond to competitive developments,
- continue to develop our sales infrastructure,
- attract, train, motivate and retain management and other
personnel and
- maintain the high quality of our services.
IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
We believe there has recently been a significant increase in businesses
outsourcing services not directly related to their principal business
activities. Our business, results of operations and financial condition could be
materially adversely affected if the outsourcing trend declines or reverses, or
if corporations bring previously outsourced functions back in-house.
Particularly during general economic downturns, businesses may bring in-house
previously outsourced functions in order to avoid or delay layoffs.
IF WE ARE NOT ABLE TO RETAIN OR EMPLOY QUALIFIED EMPLOYEES, INCLUDING KEY
EXECUTIVES, OUR EMPLOYMENT-RELATED COSTS MAY RISE AND OUR RESULTS OF OPERATIONS
COULD SUFFER.
WE MAY NOT BE ABLE TO RETAIN OR EMPLOY QUALIFIED MANAGERS.
We depend in large part on the abilities and continuing efforts of our
executive officers and senior management. Our business and prospects could be
materially adversely affected if (1) current officers and managers do not
continue in their key roles and we cannot attract and retain qualified
replacements or (2) we cannot attract and retain additional qualified personnel
to sustain growth. We have employment agreements with our key executive
officers. We cannot assure you that we will be able to retain them. We only
maintain key man life insurance on Scott D. Dorfman, in the amount of $3.5
million. In order to support growth, we must effectively recruit, develop and
retain additional qualified management personnel. We cannot assure you that in
the future we will be able to recruit and retain additional qualified managers.
WE MAY NOT BE ABLE TO RETAIN OR EMPLOY OTHER QUALIFIED EMPLOYEES.
Our success depends largely on our ability to recruit, hire, train and
retain qualified employees. If we cannot do so, our business, results of
operations or financial condition could be materially adversely affected. Our
industry is very labor-intensive and has experienced high personnel turnover. If
our employee turnover rate increases significantly, our recruiting and training
costs could rise and our operating effectiveness and productivity could decline.
New clients or new large-scale marketing support programs may require
accelerated recruiting, hiring and training. We cannot assure you that we will
be able to continue to hire, train and retain sufficient qualified personnel to
adequately staff new marketing support programs.
Some of our operations, particularly technical support and customer
service, require specially trained personnel. In addition, the unemployment rate
in the geographic area where our facilities are located is relatively low. Our
need for specially trained personnel and low unemployment rates may make it more
difficult and costly to hire and retain qualified personnel.
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Currently, we are not a party to any collective bargaining agreements.
None of our employees are unionized. Although we consider our relationship with
our employees to be good, there have been occasional unionization initiatives at
Innotrac, particularly among our call center personnel. If our employees were to
join unions, we could incur increased wages, employee benefits and
employment-related administrative costs. A significant portion of our operating
expenses relates to labor costs. Therefore, an increase in wages or employee
benefits could materially adversely affect our business, results of operations
or financial condition.
COMPETITION MAY HURT OUR BUSINESS.
We operate in highly competitive markets and expect this environment to
persist and intensify in the future. Because our marketing support services
comprise marketing and product consultation, sales channel management,
fulfillment and back-end support, including our call center operations, we have
many competitors who offer one or more of these services. Our competitors
include:
- in-house marketing support operations of our current and
potential clients,
- other firms offering specific services, like fulfillment and
call center operations and
- large marketing support services firms.
A number of our competitors have developed or may develop financial and
other resources greater than ours. Additional competitors with greater name
recognition and resources may enter our markets. Our existing or potential
clients' in-house operations are also significant competitors. Our performance
and growth could be negatively impacted if:
- existing clients decide to provide, in-house, services they
currently outsource,
- potential clients retain or increase their in-house
capabilities or
- existing clients consolidate their outsourced services with
other companies.
In addition, competitive pressures from current or future competitors
could result in significant price erosion, which could in turn materially
adversely affect our business, financial condition and results of operations.
For more information about our competition, see "Business--Competition" in this
Item 1.
IF WE ARE NOT ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.
Our success depends significantly upon our ability to:
- enhance existing services,
- develop applications to focus on our clients' needs and
- introduce new services and products to respond to
technological developments.
If we fail to maintain our technological capabilities or respond
effectively to technological changes, our business, results of operations and
financial condition could be materially adversely affected. We cannot assure you
that we will select, invest in and develop new and enhanced technology on a
timely basis in the future in order to meet our clients' needs and maintain
competitiveness. We provide details about our technology in
"Business--Technology" in this Item 1.
OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY CAUSE SIGNIFICANT SWINGS IN THE
MARKET PRICE FOR OUR COMMON STOCK.
Our operating results may fluctuate in the future based on many
factors. These factors include, among other things:
- changes in the telecommunications industry,
- changes in the marketing support services industry,
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- changes in the timing and level of client-specific marketing
programs, including the timing and nature of promotions,
- increased competition and
- changes in customer purchasing patterns for products we
fulfill.
Due to these and any unforeseen factors, it is possible that in some
future quarter our operating results may be below the expectations of public
market analysts and investors. If that variance occurs, our common stock price
would likely decline materially.
OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES
OR INCREASE OUR COSTS.
In connection with any outbound telemarketing services that we provide,
we must comply with federal and state regulations. These include 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 we conduct outbound telemarketing
services, these rules and regulations would apply to that portion of our
business.
Furthermore, there may be additional federal and state legislation or
changes in regulatory implementation. These changes could include
interpretations under the Telecommunications Act of 1996 restricting the ability
of telecommunications companies to use consumer proprietary network information,
or CPNI. New legislation or regulatory implementation in the future may
significantly increase compliance costs or limit our activities, our clients'
activities or the activities of companies to which we outsource outbound
telemarketing functions. Additionally, we could be responsible for failing to
comply with regulations applicable to our clients or companies to which we
outsource telemarketing.
If unfavorable federal or state legislation or regulations affecting
Caller ID service, internet service or other technology related to products we
fulfill and provide customer support for are adopted, our business, financial
condition and results of operations could be materially adversely affected. See
"Business -- Government Regulation" in this Item 1 for further information about
government regulation of our business.
IF THE RETURN.COM BUSINESS MODEL IS UNSUCCESSFUL, SIGNIFICANT REVENUES ARE NOT
GENERATED TO PRODUCE POSITIVE CASH FLOW OR MBE IS UNABLE TO CONTINUE AS AN
INVESTMENT PARTNER, WE MAY NOT RECOVER OUR INVESTMENT IN RETURN.COM.
As of December 31, 2000, we own 60% of Return.com, a start-up company
formed for the purpose of handling product returns from catalogers and
e-tailers. The Return.com business model is still not proven, the company has
yet to generate any revenues and cash flow remains negative. Innotrac has
invested $3.0 million in Return.com and has committed to an additional $3.0
million of funding. Additionally, it was announced in March 2001, that MBE is
in the process of being acquired by UPS.
There are no assurances that the Return.com business model will be
successful or that Return.com will generate significant enough revenues to
become cash flow positive. Further, with the announced acquisition of MBE by
UPS, there are no assurances that UPS will support or allow MBE to continue its
investment in Return.com. If one or a combination of the above events were to
occur, Innotrac may not recover its investment in Return.com.
IF WE ARE UNABLE TO INTEGRATE ACQUIRED BUSINESSES SUCCESSFULLY AND REALIZE
ANTICIPATED ECONOMIC, OPERATIONAL AND OTHER BENEFITS IN A TIMELY MANNER, OUR
PROFITABILITY MAY DECREASE.
If we are unable to integrate acquired businesses successfully, we may
incur substantial costs and delays in increasing our customer base. In addition,
the failure to integrate acquisitions successfully may divert management's
attention from Innotrac's existing business and may damage Innotrac's
relationship with its key customers and suppliers. Integration of an acquired
business may be more difficult when we acquire a business in a market in which
we have little or no expertise, or with a corporate culture different from
Innotrac's.
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EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of Innotrac are as follows:
NAME AGE POSITION
---- --- --------
Scott D. Dorfman................ 43 Chairman of the Board, President and Chief
Executive Officer
David L. Ellin.................. 42 Senior Vice President and Chief Operating
Officer
Larry C. Hanger................. 46 Senior Vice President--Business Development
David L. Gamsey ................ 43 Senior Vice President, Chief Financial Officer and
Secretary
William F. Hendrick, Jr......... 44 Vice President--Telecommunications
Clifford A. Ruden............... 42 Vice President--Sales
Mr. Dorfman founded Innotrac and has served as Chairman of the Board,
President and Chief Executive Officer since its inception in 1984. Prior to
founding Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company,
Inc., 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 us in 1986 and has served as Senior Vice President and
Chief Operating Officer since November 1997 and as a director since December
1997. He served as 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. Hanger joined Innotrac in 1994 and has served as Vice
President--Business Development since November 1997 and as a director since
December 1997. He was promoted to Senior Vice President in April 1999. He served
as Innotrac's 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 Telecommunications, Inc., a regional
telecommunications company, where he managed the marketing program for
BellSouth's network services and was involved in implementing the billing
options program for BellSouth with Innotrac.
Mr. Gamsey joined Innotrac in May 2000 as Senior Vice President, Chief
Financial Officer and Secretary. Prior to joining Innotrac, from September 1995
to May 2000, he served as Chief Financial Officer of AHL Services, Inc., a
provider of contract staffing and outsourcing solutions. From 1988 to September
1995, Mr. Gamsey was a Managing Director of Investment Banking at the accounting
firm Price Waterhouse LLP (now PricewaterhouseCoopers LLP). From 1987 to 1988,
he served as Chief Financial Officer of Visiontech, Inc., a manufacturer of
contact lenses, and from 1979 to 1987, he was a Senior Audit Manager for the
accounting firm Arthur Andersen LLP. Mr. Gamsey is a certified public
accountant.
Mr. Hendrick joined Innotrac in April 1999 as Vice
President-Telecommunications. Prior to joining Innotrac, from November 1997 to
February 1999 he served as Vice President and General Manager for the former
telecommunications division of InteliData Technologies Corp., which designed and
distributed consumer telephone products. He also served as Vice President--Sales
at InteliData and its predecessor from August 1995 to November 1997. He held the
position of Senior Director--Product
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Management with BellSouth from January 1993 to July 1995, and has also served as
Director--Product Development for that company. Mr. Hendrick has 20 years
experience in the telecommunications industry.
Mr. Ruden joined Innotrac in December 2000 as Vice President--Sales.
Prior to joining Innotrac, from February 1998 to December 2000 he held the
positions of Client Management Officer and Vice President of Sales for
ClientLogic Corporation, a provider of customer contact management, fulfillment
and marketing services. Prior to his employment with ClientLogic, from December
1997 to February 1998 Mr. Ruden served as National Sales Manager at West
Teleservices Corporation, a provider of inbound, outbound and interactive
teleservices, and from September 1996 to December 1997 he was Major Account
Manager at Neodata Services, a customer relationship services provider (now a
division of EDS). Mr. Ruden was employed by FedEx Corporation, a global shipping
company for 10 years, where he held Global and National Sales Executive
positions. Mr. Ruden has 18 years of sales experience.
ITEM 2. PROPERTIES
Our headquarters and fulfillment facilities are located in 250,000
square feet of leased space in Duluth, Georgia. Our corporate offices occupy
50,000 square feet of this facility and the remaining 200,000 square feet is
fulfillment space. This site also includes approximately 3.5 acres that will be
available for Innotrac's expansion requirements, if required. The lease for our
Duluth facility commenced in October 1998 and has a term of 10 years with 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. We have not yet determined whether to exercise this
purchase option.
We provide teleservices through our call center located in Duluth,
Georgia. We renewed the lease for the center in May 1999 for a term of three
years. The call center is currently configured with approximately 460
workstations of which approximately 100 are being used at present. It currently
operates twenty-four hours a day, seven days a week.
In June 1999, we entered into a lease for a new facility in Pueblo,
Colorado with an initial term of five years with two five year renewal options.
The facility provides approximately 87,000 square feet of floor space.
Approximately 45,000 square feet is used as a second call center, as well as
quality assurance, administrative, training and management space. This call
center supports 390 workstations and utilizes 375 of the workstations at
present. It currently operates from 6:00 a.m. to 9:00 p.m. Monday through Friday
and from 6:00 a.m. to 6:00 p.m. on Saturday (Mountain Standard Time). The
remaining 42,000 square feet is used for fulfillment.
In October 1999, we entered into a lease for a facility in Duluth,
Georgia with an initial term of five years with one three-year renewal option.
The facility provides approximately 52,000 square feet of floor space for our
literature fulfillment business.
With the acquisition of UDS, located in Reno, Nevada, in December 2000,
we operate a facility that consists of over 275,000 square feet and includes a
call center that can support 240 workstations. UDS leases this facility through
two lease agreements which were initiated in August 1999 and October 2000. These
agreements have lease terms of 3 years and 7 years, respectively. Currently, the
call center is configured with approximately 120 workstations. At this time, the
call center operates twenty-four hours a day, seven days a week. The remainder
of the facility is used for fulfillment.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceeding. We are, from time
to time, a party to litigation arising in the normal course of our business.
Management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on our financial position or
results of operations.
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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.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market under
the symbol "INOC". The following table sets forth for the periods indicated the
high and low sales prices of the Common Stock on the Nasdaq National Market.
HIGH LOW
-------- --------
2000
First Quarter ................................. $ 13.500 $ 6.750
Second Quarter ................................ $ 8.250 $ 4.750
Third Quarter ................................. $ 6.750 $ 4.750
Fourth Quarter ................................ $ 5.750 $ 3.125
Fiscal Year Ended December 31, 2000 ........... $ 13.500 $ 3.125
1999
First Quarter ................................. $ 18.500 $ 10.000
Second Quarter ................................ $ 21.250 $ 14.125
Third Quarter ................................. $ 26.750 $ 15.250
Fourth Quarter ................................ $ 17.625 $ 10.625
Fiscal Year Ended December 31, 1999 ........... $ 26.750 $ 10.000
The approximate number of holders of record of Common Stock as of March
21, 2001 was 74. The approximate number of beneficial holders of our Common
Stock as of that date was 3,000.
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 2000 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
2000 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 2000 Annual Report
to Shareholders, filed as an exhibit hereto, is incorporated herein by
reference.
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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 2000 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.
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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 2001 Annual Meeting of Shareholders, to be 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 2001 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 2001 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 "Related Party
Transactions" in the definitive Proxy Statement used in connection with the
solicitation of proxies for the Company's 2001 Annual Meeting of Shareholders,
filed with the Commission, is hereby incorporated herein by reference.
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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, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999, and 1998
Consolidated Statements of Partners', Members' and Shareholders'
Equity for the years ended December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999, and 1998
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants as to Schedules
Schedule II - Valuation and Qualifying Accounts
3. EXHIBITS
The following exhibits are required to be filed with this Report by
Item 601 of Regulation S-K:
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
3.1 Amended and Restated Articles of Incorporation of the Registrant, (incorporated
by reference to Exhibit 3.1 to the Registrant'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 Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form S-1/A (Commission
File No. 333-79929), filed with the Commission on July 22, 1999)
4.1 Form of Common Stock Certificate of the Registrant (incorporated by reference to
Exhibit 4.1 to the Registrant'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(a) 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
Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 11, 1998)
(b)** First Amendment to the Rights Agreement dated as of November 30, 2000 between the
Company, Reliance Trust Company and SunTrust Bank, dated as of November 30, 2000
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10.1+(a) Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2
to the Registrant'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 Registrant's Amendment No. 1 to Registration
Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission
on February 11, 1998)
10.2+ 2000 Stock Option and Incentive Award Plan and amendment thereto (incorporated
by reference to Exhibit 4.3 and 4.4 to the Registrant's Form S-8 (Commission
File No. 333-54970) filed with the Commission on February 5, 2001)
10.3 Purchase Agreement for Services between BellSouth Telecommunications, Inc. and
the Registrant, effective November 1, 1998 (incorporated by reference to Exhibit
10.4 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26,
1999)
10.4(a) Form of Indemnification Agreements entered into as of December 11, 1997, by and
between the Registrant and each of Messrs. Scott D. Dorfman, David L. Ellin,
Larry C. Hanger, 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 Registrant's Registration Statement on Form
S-1 (Commission File No. 333-42373), filed with the Commission on December 16,
1997)
(b) Form of Indemnification Agreements by and between the Registrant and each of
Stephen J. Walden and Will Hendrick (incorporated by reference to Exhibit
10.5(b) to the Registrant's Form S-1 (Commission File No. 333-79929), filed with
the Commission on June 3, 1999)
10.5 Lease, dated June 16, 1999, between Lockheed Martin Corporation and the
Registrant (incorporated by reference to Exhibit 10.6 to the Registrant's Form
S-1/A (Commission File No. 333-79929),filed with the Commission on June 28, 1999)
10.6 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant
(incorporated by reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission
on December 16, 1997)
10.7(a) Lease, dated December 8, 1997, by and between Weeks Development Partnership and
the Registrant (incorporated by reference to Exhibit 10.8 to the Registrant's
Amendment No. 1 to Registration Statement on Form S-1 (Commission File No.
333-42373), filed with the Commission on February 11, 1998)
(b) First Amendment to Lease Agreement dated May 1 1999, by and between Weeks
Development Partnership and the Registrant (incorporated by reference to Exhibit
10.8(b) to the Registrant's Registration Statement on From S-1/A (Commission
File No. 333-79929), filed with the Commission on June 28, 1999)
10.8** Sublease Agreement, dated May 26, 1999, by and between HSN Realty LLC and Universal
Distribution Services, Inc.
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10.9(a)** Master Lease Agreement and Addendums, dated March 20, 2000, by and between
Computer Sales International, Inc. and the Registrant
(b)** First Amendment to Master Lease Agreement dated June 8, 2000, by and between
Computer Sales International, Inc. and the Registrant
(c)** Second Amendment to Master Lease Agreement dated September 28, 2000, by and
between Computer Sales International, Inc. and the Registrant
10.10+ Split Dollar Life Insurance Agreement, dated July 10, 1997, by and between the
Registrant, 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
Registrant'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+ Innotrac Corporation Deferred Compensation Plan, effective as of October 16,
1997 (incorporated by reference to Exhibit 10.10 to the Registrant'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+ Grantor Trust Agreement dated October 16, 1997, by and between the Registrant
and Wachovia Bank, N.A. (incorporated by reference to Exhibit 10.11 to the
Registrant's Amendment No. 1 to Registration Statement on Form S-1/A (Commission
File No. 333-42373), filed with the Commission on February 11, 1998)
10.13(a) Amended and Restated Loan and Security Agreement between the Registrant and
SouthTrust Bank, N.A., dated January 25, 1999 (incorporated by reference to
Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission File No. 0-23741), filed with the Commission on
March 26, 1999)
(b) First Amendment to Amended and Restated Loan and Security Agreement by and
between the Registrant and SouthTrust Bank, N.A., dated April 29, 1999
(incorporated by reference to Exhibit 10.14(b) to the Registrant's Registration
Statement on Form S-1 (Commission File No. 333-79929), filed with the Commission
on June 3, 1999)
(c) Letter Modification/Waiver to Amended and Restated Loan and Security Agreement,
as amended, effective August 14, 2000 (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-23741),
filed with the Commission on November 13, 2000)
10.14+** 2001 Senior Executive Incentive Compensation Plan
10.15(a) Contract by and between Market Reps, Inc. and the Registrant, dated June 26,
1998 (incorporated by reference to Exhibit 10.17(a) to the Registrant's
Registration Statement on Form S-1/A (Commission File No. 333-79929), filed with
the Commission on July 22, 1999)
(b) Letter Amendment to Contract by and between Market Reps, Inc. and the Registrant,
dated August 10, 1998 (incorporated by reference to Exhibit 10.17(b) to the
Registrant's Registration Statement on Form S-1/A (Commission File No. 333-79929),
filed with the Commission on July 22, 1999)
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10.16* Master Agreement for Products and Services between the Company and SBC
Operations, Inc. effective July 1, 1999 (incorporated by reference to Exhibit
10.18 to the Registrant's Quarterly Report on Form 10-Q (Commission File No.
0-23741), filed with the Commission on September 30, 1999)
10.17 Shareholders Agreement dated May 16, 2000, by and among the Registrant,
Return.com Online, Inc., and Mail Boxes Etc., USA, Inc. (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
(Commission File No. 0-23741), filed with the Commission on August 14, 2000)
10.18(a) Amended and Restated Employment Agreement dated August 21, 2000, by and between
David L. Gamsey and the Registrant (incorporated by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10Q/A (Commission File No. 0-23741),
filed with the Commission on August 21, 2000)
(b)** Amendment to Amended and Restated Employment Agreement dated February 14, 2001,
by and between David L. Gamsey and the Registrant
10.19 Employment Agreement dated August 31, 2000, by and between Scott D. Dorfman and
the Registrant (Incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the
Commission on November 13, 2000)
10.20 Employment Agreement dated August 30, 2000, by and between David L. Ellin and
the Registrant (incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the
Commission on November 13, 2000)
10.21 Employment Agreement dated August 31, 2000, by and between Larry C. Hanger and
the Registrant (incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the
Commission on November 13, 2000)
10.22** Operating Agreement dated December 28, 2000, by and among the Registrant,
Return.com Online, LLC, and Mail Boxes Etc., USA, Inc.
13.1** Portions of the Registrant's Annual Report to Shareholders for 2000 incorporated
into this Form 10-K
21.1** List of Subsidiaries
23.1** Consent of Arthur Andersen LLP
24.1** Power of Attorney (included on signature page)
99.1** Proxy Statement for the 2001 Annual Meeting of Shareholders
* Confidential treatment has been obtained 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.
** Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
22
24
(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 2000 fiscal year.
23
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of INNOTRAC CORPORATION AND SUBSIDIARY
included in this Form 10-K and have issued our report thereon dated February 2,
2001. 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 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
February 2, 2001
S-1
26
INNOTRAC CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Charged to Other End of
Description of Period Expenses Accounts Deductions Period
- ---------------------------------------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Provision for uncollectible accounts
Year ended December 31,
2000 ......................... $ 1,177 $ 3,325 $ 1,254 $ (2,340) $ 3,416
1999 ......................... 4,935 5,552 -- (9,310) 1,177
1998 ......................... 5,707 18,558 -- (19,330) 4,935
Provisions for returns and allowances
Year ended December 31,
2000 ......................... $ 297 $ 5,697 $ 12,428 $(17,697) $ 725
1999 ......................... 602 6,301 15,836 (22,442) 297
1998 ......................... -- 791 -- (189) 602
Provisions for restructuring charge
Year ended December 31,
2000 ......................... $ -- $ 3,650 $ -- $ (1,787) $ 1,863
1999 ......................... -- -- -- -- --
1998 ......................... -- -- -- -- --
S-2
27
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 30th day of
March, 2001.
INNOTRAC CORPORATION
By: /s/ Scott D. Dorfman
-----------------------------------------
Scott D. Dorfman
Chairman of the Board, President
and Chief Executive Officer